Printed from

Employees won't be taxed on adult children coverage

Posted On: May. 2, 2010 12:00 AM CST

WASHINGTON—Employers can amend their health care plans immediately to extend coverage to employees' adult children without employees being taxed on the cost of the coverage, the Internal Revenue Service said last week.

IRS Notice 2010-38 involves a provision in the health care reform law that will require health care plans to extend coverage to employees' adult children up to age 26 and allows—for employers that wish to—tax-favored coverage through the end of the calendar year in which the child turns 26.

That adult child coverage provision takes effect on the first day of a plan year that starts six months after the March 23 enactment of the law. For employers with calendar-year plans, which are the most common, the requirement begins in Jan. 1, 2011.

Many major health insurers already have said they will expand coverage to adult children ahead of the mandate, unless employers object. The group includes Aetna Inc., Blue Cross & Blue Shield Assn. plans, CIGNA Corp., Humana Inc., Kaiser Permanente, UnitedHealth Group Inc. and WellPoint Inc. In addition, some self-funded employers are considering amending their plans.

Typically, group plans have offered coverage of employees' children to age 18 or 19, or age 22 or 23 if the child is a full-time college student.

The insurers' moves, though, triggered questions from employers concerned that expanding coverage ahead of the effective date would result in employees being taxed on the cost of the coverage.

Prior to the health care reform law, U.S. Tax Code allowed tax-free coverage of employees' children up to age 19, or up to age 24 for full-time students.

In its notice last week, the IRS clearly ended employer concerns about any adverse tax consequences to employees if adult child coverage is expanded now, prior to the effective date of the health care reform law's requirement.

In the notice, the IRS said the tax law change regarding insurance coverage of employees' adult children took effect when President Barack Obama signed the health care reform legislation at the end of March.

“This notice makes clear that parents who can keep their children under 27 on their health insurance plan won't have to pay additional taxes to do so,” said Treasury Department Assistant Secretary for Tax Policy Michael Mundaca.

The notice also makes clear that flexible spending accounts can be amended now to pay for uncovered expenses of employees' dependent children under to age 27. The IRS said it will issue regulations, which would be retroactive to when President Obama signed the legislation, to allow FSAs to cover such expenses for nondependent children under to age 27 at a later date.

Government officials said they acted rapidly in developing the guidance to expedite adoption of the coverage.

“We want to make it as easy as possible for employers to quickly implement this change and extend health coverage on a tax-favored basis to older children of their employees,” IRS Commissioner Doug Shulman said.