Adult child coverage rules issuedPosted On: May. 16, 2010 12:00 AM CST
WASHINGTON—Employers now have regulatory guidance to comply with the health care reform law mandate that they extend coverage to employees' adult children up to age 26.
Joint guidance issued last week by the Departments of Labor, Health and Human Services and the Internal Revenue Service resolves one key issue—whether employers can impose surcharges for the expanded coverage on which the new law is silent—and clarifies numerous other issues. (see box).
Perhaps most significantly, the rules were issued less than two months after President Barack Obama signed the legislation into law. That gives employers time to analyze the rules and consider changes they must make to their health care plans to comply with the young adult child coverage mandate.
“The first surprise is how quickly the rules came out and how clear they are. That will allow employers to take action that won't be rushed,” said Randy Abbott, a senior consultant with Towers Watson & Co. in Wellesley Hills, Mass.
The biggest issue resolved in the regulations is whether employers can impose surcharges on employees for the expanded coverage. The rules say they cannot.
“That was a very big question for employers as they looked at future plan design,” said Jennifer Henrikson, a legal consultant with Hewitt Associates Inc. in Lincolnshire, Ill.
“The terms of the plan or health insurance coverage providing dependent coverage of children cannot vary based on age,” according to the regulations published in the May 13 issue of the Federal Register.
That position “is not a surprise, but it was the most significant open issue,” said Rich Stover, a principal with Buck Consultants L.L.C. in Secaucus, N.J.
But other pricing strategies will be permitted. For example, employers could base employee premiums on the number of covered dependents.
“You could have more premium tiers,” said Chris Renz, a partner in the San Francisco office of Mercer L.L.C.
An example in the regulations of a permitted premium structure says premium levels can be set for employee-only coverage, the employee plus one dependent, the employee plus two dependents and the employee plus three or more dependents.
Such a tiered structure is legal because “the terms of dependent coverage for children do not vary based on age. Although the cost of coverage increases for tiers with more covered individuals, the increase applies without regard to the age of any child,” according to the regulations.
Alternatively, employers could absorb the additional cost, which the government estimates will average about 0.7%, or boost employees' premiums for dependent coverage.
Experts say the regulations affirm the intent of the law: That the age of an employee's adult child up to age 26 is the sole determining factor when employers can stop providing coverage to the adult children.
As for notification requirements, employers with calendar-year plans could provide notice of the coverage during their open enrollment period, which typically is in October or November, and give employees the opportunity to make their benefit plan selections for the next year.
While the adult child provision can be part of open enrollment materials, the information about the provision and enrollment opportunity must be “prominent,” according to the regulations.
On the other hand, the notice and enrollment opportunity could be provided as late as the first day of the plan year that begins after Sept. 23. For calendar-year plans, that would be Jan. 1, 2011. In that case, that enrollment right would last 30 days and coverage would be retroactive to Jan. 1.
Communicating the extension-of-coverage provision will be challenging, Mercer's Mr. Renz said. For example, employers have to explain that employees' children who previously lost coverage because they aged out will again be eligible to enroll if they are younger than 26.
Even employees' children who never had coverage through the employer could be eligible. That could happen, for example, if an employee with a 24-year-old child were hired this year by a business that previously halted coverage for employees' children at age 23.
“Explaining this all very clearly will be a communications challenge,” Mr. Renz said.