Age 26 Dependent Guidance

The various agencies charged with implementing health care reform have issued interim final regulations on the extension of dependent coverage to young adults up to age 26. The guidance fills in some of the gaps as to how this new rule will work, but still leaves some issues yet to be resolved.

The new guidance is timely, given the efforts of the Secretary of Health and Human Services to encourage insurers to offer this coverage earlier than required by the law. Key issues addressed by the guidance include:

Effective Date – The effective date is the first plan year beginning on or after September 23, 2010;

Eligible Dependent – Once the new rules become effective for a plan, the only restriction on dependent eligibility for a child of a participant (if the plan covers dependents) will be the age 26 cutoff – a plan will not be able to exclude otherwise eligible dependents based on:

living apart from the participant,
financial independence or employment,
marriage (although the dependent’s spouse and children do not have to be offered coverage),
student status, or
the availability of other coverage from their job (except for grandfathered plans);

Type of Dependent Coverage Can't Vary by Age – An employer will not be allowed to require different levels of coverage for dependents based on age (except on and after age 26, if the employer extends such coverage). This will prevent employers from attempting to avoid extending coverage by providing lesser coverage for adult dependents.

Cost of Coverage – Employers will have to bear the same share of the cost for the extended coverage that they do for coverage of younger dependents. This appears to mean, for instance, that if the employee is already paying a family rate because of younger children, the extension of coverage to the adult dependent would not increase the employee’s premium. Similarly, if the adult dependent is the only child and there are premium tiers for employee, employee plus one and family, the employee would be charged the premium for the applicable tier that results from the continued coverage of the adult dependent or the new tier, if any, based on the addition of the adult dependent if currently aged out. This will prevent employers from attempting to avoid extending coverage by imposing additional premiums for adult dependents.

Grandfathered Plans - The adult children provisions apply with respect to grandfathered coverage only if such adult child is not eligible to enroll in another group health plan other than a group health plan of a parent. So, if a child under the age of 26 is not eligible for his own employer’s coverage and both parents have separate plans that offer dependent coverage, neither parent's plan can deny coverage.

Special Enrollment for Currently Aged Out Dependents – An adult dependent who is under the age of 26 as of the date these new rules become effective for a plan and is not covered by the plan as of that date, will have to be given a 30 day period to enroll beginning on the compliance effective date. This special enrollment right will require that a notice be provided to the dependent explaining the enrollment right and will allow the coverage to be retroactive to the beginning of the election period.

The notice can be given to the employee for the dependent - this will likely reduce the administrative burdens of the special enrollment process;
Since the effective date is based on the plan year, many plans will be able to accomplish the special enrollment notice and election as part of the open enrollment process.

Note: It is unclear whether allowing retroactive coverage poses a cafeteria plan problem. To be safe, if the employer has a cafeteria plan it should provide the notice and opportunity in advance so that the election will be made prior to the effective date of coverage.

Early Coverage - At the urging of the Secretary of Health and Human Services, most of the major group health insurers are offering to extend age 26 dependent coverage to existing group policies on a limited basis before the effective date for the particular employer. A similar acceleration is being offered under self insured arrangements administered by these carriers.

Acceleration is Optional – In most cases, the acceleration is optional, although the opt-out may be hidden in the fine print of the insurer’s communication to the employer (in some States, the insurance regulators have agreed to mandate the acceleration for small policies - usually under 100 lives);
Acceleration is Limited – Acceleration will generally only be offered to dependents who are currently covered and will age out after the accelerated effective date (June 1, in most cases – this is aimed at the emerging group of college students about to graduate and who would otherwise age out because of that);
No Increase in Current Premium – Most of the insurers are offering the acceleration at no additional premium during the current policy period;
Acceleration May Affect Claims Experience – Although the insurers are generally not “charging” for the accelerated coverage, there is no indication that the actual utilization by the newly covered adult dependents won’t be taken into account in determining a plan’s claims experience (some would point out, however, that these individuals would hit a plan’s experience under COBRA).

Taxability - Health care reform provides that health contributions and reimbursements for a child who does not turn age 27 by December 31 of a calendar year are no longer taxable to the employee for the entire calendar year, even if the child does not qualify as the employee's tax dependent for health coverage purposes. This means that employees whose dependents receive extended coverage under the age 26 rules will generally not have imputed income on the value of the employer paid portion of that coverage.

The IRS has already issued guidance on this issue. Notably, the nontaxability does not appear to extend to HSA distributions. Also, employers must amend their cafeteria plans by December 31, 2010.

Next Steps – Employers should review their current programs to assess the impact of the new rules. Key considerations include:

Acceleration – offers of accelerated coverage should be carefully reviewed with the insurer, especially in regard to the impact of negative claims experience on future rates;
Coverage after “age out” – Most plans continue to cover aged out dependents for a specified period following the age out date –end of the calendar month, or in some cases, end of the calendar year. Plans with end of calendar year extensions should be reviewed to assess the cost impact resulting from the newly expanded coverages group; and
Timing – If the open enrollment period is different from the plan year (e.g. policy renewal and plan year differ) the new rules may not become effective until after the next open enrollment. If an employer chooses to defer compliance until the actual effective date in this kind of situation, the special enrollment notices and election rights required for currently aged out dependents will have to be provided and administered as a separate endeavor.

We will continue to monitor developments and provide additional guidance and insights as they develop.