Extended-Coverage Laws Can Burden Employers

Employers are coping with a growing number of laws that extend the age to which insured plans must offer coverage to employees’ adult dependent children.

While there is variation in these laws—which now have been passed in more than two dozen states—they generally require employer health plans to offer continued coverage for adult dependent children still living at home.

And while the cost is not generally considered significant, the laws do create administrative burdens for employers, particularly those with multistate operations.

Previously, these state laws, which do not apply to self-insured plans, generally required that health plans cover employees’ children up to age 19 if they did not attend college, or generally to 24 if they were full-time students. But measures that have been passed in recent years extend coverage in many cases to age 25 or 26. In New Jersey, coverage must be offered up to age 30, the oldest cutoff among states.

And in many cases, the laws no longer require the dependent to be a student. For example, legislation signed last week by Kentucky Gov. Steve Beshear requires health plans to offer coverage for all young adults up to age 25. Previously, only students had to be covered up to that age.

Observers say the impetus behind the legislation is the large percentage of young adults that are uninsured. According to a 2007 study by the New York-based Commonwealth Fund, those ages 19 to 29 represent one of the largest and fastest-growing segments of the U.S. population without health insurance. In 2005, they accounted for 30 percent of the non-elderly uninsured even though they made up just 17 percent of the under-65 population, according to the study.

States regard these laws as a convenient way to address this issue without incurring any expense to themselves, observers say.

More legislation can be expected, said J.D. Piro, an attorney with Hewitt Associates Inc. in Norwalk, Connecticut.

“It’s a fairly easy fix—there’s no money required from the state and you can pass it on to the employers—so I wouldn’t be surprised to see more of this,” he said.

Joanne Hustead, Washington-based senior health compliance specialist-national compliance practice with the Segal Co., said, “A few of the laws say employers don’t have to pay for it, but most of them don’t even address that issue.”

On their face, these laws are not significantly costly to employers. Companies often pass on any additional premiums that result from complying with these laws to employees, observers say. Furthermore, young adults are a particularly healthy segment of the population and are less likely than other demographic groups to generate claims.

At the same time, such laws do increase the number of those covered, which will lead to at least some additional claims and ultimately some increased costs for employers.

Presumably, “it will cost more, but we haven’t seen how that’s broken out, at least in any kind of a direct way with respect to the expansion of coverage,” said Jay M. Kirschbaum, St. Louis-based national practice leader, legal and research group, for Willis North America Inc.

Depending on the experience, extending coverage for a longer period to employees’ older dependent children could lead to higher premiums, said Carol Tavella, senior manager with SMART Business Advisory & Consulting in Devon, Pennsylvania.

Even though this is not the most expensive group to insure, “it really takes only one really expensive” claim to seriously raise premiums, especially at small firms, said James Gelfand, senior manager-health policy at the U.S. Chamber of Commerce in Washington.

“It certainly widens or opens the door to risk,” said Randall Abbott, a senior consultant with Watson Wyatt Worldwide in Wellesley Hills, Massachusetts. Some young people engage in “risky behaviors that can generate substantial health claims, so from that point of view I’m more concerned from a broader risk perspective than I am from an immediate cost basis,” Abbott said.

Bill Lindsay, president of the Lockton Benefits Group in Denver, said the laws also “create adverse selection, in that the state law appeals to those who have health conditions and can’t obtain coverage on their own.”

A bigger concern for employers is the additional administration under such laws, observers say.

Rich Stover, a principal with Buck Consultants in Secaucus, New Jersey, said that “just the basic tracking of all these laws and keeping up to date on what the requirements are is very, very difficult.”

At Golden, Colorado-based Coors Brewing Co., it took some effort to ensure employees were notified of the provisions of Colorado’s law, which took effect in 2006, said a spokeswoman. She said the number of those affected by the law, which the company is not tracking, has been low. The Colorado law allows employees’ dependent adult children to keep coverage until age 25, even if they are not enrolled in an educational institution, as long as they are unmarried and are financially dependent on or live with a parent.

Fritz Hewelt, Minneapolis-based vice president and regional practice leader of Aon Consulting’s benefit plan compliance review services practice, said that “it’s just the administrative and communication and documentation and enrollment issues that follow anytime you have different plan designs.”

Stover said that in one case he encountered last year, an employee alerted his employer that Delaware had enacted such a law, when the firm’s insurer had been unaware of it.

Some clients in New Jersey, whose law took effect in 2006, have also either dropped insured health maintenance organizations from their programs or self-funded the plans if they are large enough, to avoid the state mandates, rather than trying to deal with the administrative complexity, Stover said.

In addition, because of the definition of a dependent under federal law, there may be a disparity between who is considered a dependent under federal law and under state law. This means that if there is any employer contribution, employers must track the value of the coverage as “imputed” taxable income for the employee.

The tax treatment in cases where the child is not considered a dependent under federal law is “another administrative burden for the employer,” because that can change from year to year, said Wendy Bunnell, an attorney with Halleland Lewis Nilan & Johnson in Minneapolis.

“In my mind, the thing we get the most questions on is relative to the tax treatment and the problems that that causes for many multistate [insured companies],” Hewelt said.

Filed by Judy Greenwald of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.