Insurance Coverage of Children Through Age 26 Tax-Free, IRS Says

By Staff Report

May. 4, 2010

Employers can amend their health care plans immediately to provide tax-free coverage to employees’ adult children, the Internal Revenue Service said last week.

IRS Notice 2010-38—eagerly awaited by employers and insurers—involves a provision in the new health care reform law that will require health care plans to extend coverage to employees’ adult children up to age 26 and allows tax-favored coverage through the end of the calendar year in which the child turned 26.

That provision takes effect on the first day of a plan year starting six months after the March 23 enactment of the law. For employers with calendar-year plans, which are the most common, the coverage requirement begins January 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., Cigna Corp., Humana Inc., Kaiser Permanente, UnitedHealth Group Inc. and WellPoint Inc. In addition, some self-funded employers are considering amending their plans now.

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

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

Before the health care reform law, the Tax Code allowed tax-free coverage of employees’ children up to age 19, or up to age 24 if the dependent child is a full-time student.

While the coverage requirements do not apply until later, the IRS said in the notice that the tax law change regarding insurance coverage of employees’ older adult children took effect when President Barack Obama signed the legislation in March.

“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 in a statement.

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

“The guidance is very welcome and makes it very clear that employees will not be taxed if coverage is expanded before the effective date of the new requirements,” said Sharon Cohen, an attorney with Towers Watson in Arlington, Virginia.  

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail


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