As a result of changes made under the Affordable Care Act, health coverage provided for an employee’s children under 27 years of age is now generally tax-free to the employee. IRS Notice 2010-38 detailed these changes
These changes allowed – but does not require – employers to permit employees to begin making pre-tax health care contributions to pay for this expanded benefit.
The age at which young adults lose parental coverage varied widely based on plan prior to this law being passed. Most plans cover dependents until they graduate from college, but many kids don’t go to college.
An estimated 485,000 young adults per year would gain coverage from the provision, a much touted early benefit of health care reform.
Employees who have children who will not reached age 27 by the end of the year are eligible for the new tax benefit forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time.
For eligibility purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.
In addition to changing the tax rules, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26.
Price increases with extended coverage are possible. Even if the timeline for the new benefit are getting clearer, it’s still far from clear how employers and insurers will price the new coverage.
They could spread the cost across their entire pool of employees with family coverage. Or they could charge families that elect to cover their young adults a separate premium, which would be noticeably higher.
There could be considerable differences in costs as more people for a longer time are covered under family plans.