Forever Young: New “Adult Children” Guidance under Health Care Reform Covers Enrollment, Surcharges

Employer-sponsored health plans will not be able to tack on special “adult children” surcharges and will have to offer an enrollment period of at least 30 days to adult children who may previously have lost coverage or been ineligible for coverage before turning 26, under interim final rules issued on May 10, 2010, interpreting one of the most closely watched parts of the landmark health reform legislation.

Those are the highlights of rules issued jointly by the Internal Revenue Service, and the Departments of Labor and Health and Human Services to help employers comply with the requirement that health plans providing dependent coverage for children must offer such coverage to adult children of participants until they reach age 26. The new mandate applies to both insured and self-funded group health plans – including “grandfathered” plans – and becomes effective for plan years beginning on or after September 23, 2010.

The New Coverage Requirement

The interim final rules, which are set to take effect 60 days after publication in the Federal Register, interpret the general rule added to the Public Health Service Act by the Patient Protection and Affordable Care Act and the related reconciliation law (together, the “Act”). The general rule itself is fairly straightforward: group health plans that offer dependent coverage of participants’ children must make such coverage available until a child reaches age 26. Many plans now offer coverage for children through age 19 (or 24 for full-time students), or some variation of those ages. Others limit coverage to children who meet some definition of “dependent.” The new rule eliminates an employer’s ability to maintain these restrictions and imposes a new mandated minimum standard for coverage for children. Of course, employers are free to extend coverage to as many individuals as they would like, but effective for plan years beginning on or after September 23, 2010, employers that offer coverage for children must, at a minimum, offer coverage for those children until they reach age 26.

Who Is Covered?

In the context of health care reform (including the new interim final rules), the phrase “dependent children” is slightly misleading because it implies that children must satisfy some “dependency” qualifications to be eligible for the new coverage to age 26. The interim final rules clarify that the only threshold requirement for this coverage is that the child is the son or daughter of the employee (including natural, step, adopted and foster children). No other qualifications may be imposed on this coverage – such as requiring the adult child to be a “full-time” student, unmarried, financially dependent on the employee, or living at home. If the employee’s child has not yet reached age 26, the plan generally must offer coverage to that child. For that matter, the phrase “adult children” is equally misleading, to the extent it implies that only individuals who are age 19 and older will qualify for coverage under this new mandate. Instead, an employee’s son or daughter of any age who was previously denied coverage due to the failure to meet a plan’s definition of dependent (for example, due to the failure to meet a tax dependency, residence or age requirement) will have the right to enroll in coverage under the new law, as long as the child has not yet reached age 26.

Limited Delay for Grandfathered Plans

The only exception to this broad coverage mandate applies to grandfathered plans. Until 2014, a grandfathered plan need not offer coverage to a child if that child is eligible for employer-sponsored coverage (other than through his or her parents). After that, even grandfathered plans must comply.

No Disparate Treatment

Faced with these new requirements, some employers have considered imposing surcharges on coverage for “adult children” or limiting their coverage options. The interim final rules would foreclose this response, as they expressly prohibit plans from varying the terms of health coverage for children (up to age 26) based on their age. Plans may raise premiums for children across the board, but cannot single out categories of dependents (or children) based on their age.

So, for example, a plan cannot charge higher premiums for coverage for children over the age of 18. Nor can plans force children above the age of 22 to enroll in an HMO instead of the indemnity option offered to all other participants. A plan is permitted, however, to charge higher rates for all children – without regard to their age. The interim final rules explain that plans may increase coverage costs on a per-person basis, so that coverage for an employee alone is charged at one rate, coverage for an employee plus one dependent triggers a higher rate, and so on, with the rates increasing as more covered individuals are added.

Enrollment for Newly-Eligible Children

Plans now must provide new enrollment rights to children who either lost coverage (such as by attaining a limiting age or ceasing to be full-time students) or who are newly eligible for coverage (based, for example, on removal of tax dependency requirement) under the Act’s new coverage requirement. Children eligible under the new rules must be provided with at least 30 days to enroll, beginning no later than the first day of the first plan year to which the age 26 requirements apply. This 30-day enrollment period, similar to the ones required under some state insurance laws, could be difficult to coordinate with existing open enrollment arrangements.

Plans will be required to provide these children with written notice advising them of their eligibility to enroll. The notice may be made to the covered employee on behalf of the employee’s child and may be included with other enrollment materials. Without regard to when the child enrolls for coverage during the enrollment period, coverage must be effective as of the first day of the first plan year beginning after September 23, 2010.

For example, the new rules would provide a special enrollment opportunity for the daughter of an employee enrolled in family coverage under a calendar-year plan that included coverage for dependent children through age 23, if the employee’s daughter was covered under the plan at the beginning of the 2010 plan year, but “aged out” of coverage in March when she turned 23. Under the new rules, the plan must provide at least a 30-day window to allow her to re-enroll in the plan beginning no later than January 1, 2011. The plan also must notify the child that she has the right to re-enroll in coverage under the plan.

The rules emphasize that children entering the plan because of the new rules must be treated as special enrollees under HIPAA’s portability mandates, and must be offered the same benefit choices offered to similarly-situated individuals in the plan.

Importantly, the Act and these interim final rules do not necessary apply to “adult” children only. Because the interim final rule prohibits plans from conditioning child coverage on “dependency” requirements, a child of any age (under 26) could become newly eligible for coverage. The notification and enrollment requirements would apply in the case of a 10-year-old child who was previously ineligible for coverage under one parent’s plan because he did not meet the requirements for “dependency” under the plan, but who becomes eligible because such dependency requirements are disallowed under the Act and rules. The plan must offer that child coverage and meet the notification and enrollment guidelines summarized above.

Tax Considerations

This guidance builds on IRS Notice 2010-38, which was released on April 27 and explained the tax changes made to the Internal Revenue Code by the age 26 provisions of the Act. The Act excludes from income of the employee the value of any employer-paid coverage provided during any plan year ending prior to the year in which the child turns 27. The Code uses age 27 so that coverage for a child who turns 26 in the middle of a plan year will still enjoy tax-favored status for the rest of the plan year. Otherwise, the plan would have to impute income with respect to coverage provided for that part of the year in which the child was 26 years old. An employer can now permit employees to pay premiums for these children on a pre-tax basis through cafeteria plans, so long as the plan is amended by year end.