Guidance on Health Coverage for Adult Dependents

By Alistair M. Nevius, J.D.

From the IRS

An IRS notice and interim final rules provide guidance on the tax treatment of health coverage for children who have not yet turned 27.

The Health Care and Education Reconciliation Act of 2010, P.L. 111-152, enacted in March, extended the general exclusion from gross income for reimbursements for medical care under an employer-provided accident or health plan (under Sec. 105(b)) to any employee’s child who has not yet turned 27 by the end of the tax year. The legislation made a similar change for retiree health accounts in pension plans, voluntary employees’ beneficiary associations, and deductions by self-employed individuals for medical insurance.

The health care legislation also requires group health plans and health insurers that provide dependent care coverage to continue to make such coverage available for an adult child until age 26. This requirement is not exactly parallel to the amendments to the Code. For example, it applies to children under age 26 and is effective for the first plan year beginning on or after September 23, 2010, while the amendments to the Code apply to children who have not yet attained age 27 at the end of the tax year and are effective March 30, 2010.

While the health care reform legislation amended Sec. 105(b), it did not amend Sec. 106, which excludes from an employee’s gross income coverage under an employer-provided accident or health plan. The IRS, in Notice 2010-38, says that “there is no indication that Congress intended to provide a broader exclusion in § 105(b) than in § 106” and states that it intends to amend the regulations under Sec. 106—retroactively to March 30, 2010—to provide that coverage for an employee’s child under age 27 is excluded from gross income.

Notice 2010-38 also says that this change to the definition of qualified child in Sec. 105 (and Sec. 106) automatically changes the definition of qualified benefits for cafeteria plans, including FSAs. Thus, a benefit will not fail to be a qualified benefit under a cafeteria plan just because it provides coverage or reimbursements that are excludible under Secs. 105(b) or 106 for a child who has not yet turned 27. The notice says that these rules also apply to health reimbursement arrangements (HRAs). The IRS says that cafeteria plans can allow employees to immediately make pretax salary reduction contributions for children under 27, even if the cafeteria plan has not yet been formally amended to provide for them.

The notice also says that coverage and reimbursements provided for an employee’s child under age 27 are not wages for FICA or FUTA purposes and are exempt from income tax withholding.


Shortly after the release of Notice 2010-38, the IRS, along with the Department of Labor and the Department of Health and Human Services, issued interim final regulations for group health plans and health insurers relating to dependent coverage for children under age 26 (T.D. 9482). The interim final regulations implement the coverage extension requirement and also invite comments. They clarify that the expansion of coverage required by the act cannot be conditioned on whether the child is a tax dependent or student, or on whether the child lives with or receives financial support from the parent. Under the regulations, a health plan or issuer may only define “dependent” based on a parent-child relationship.

The regulations further explain the apparent discrepancy between the “up to age 26” requirement for health plans and the “not yet turned 27” requirement for the exclusion from gross income. While health care plans are generally required to cover enrollees’ children up to age 26, some employers may decide to continue coverage past the child’s 26th birthday. In such a case, the value of the employer-provided health coverage will be excluded from the employee’s income for the entire tax year in which the child turns 26 (i.e., through December 31 for calendar-year taxpayers).

The interim final regulations provide transitional relief for a child whose coverage ended, or who was denied coverage (or who was not eligible for coverage) under a group health plan or health insurance coverage because, under the terms of the plan or coverage, the availability of dependent coverage of children ended before the attainment of age 26. The interim final regulations require a plan or issuer to give such a child an opportunity to enroll for at least 30 days, starting not later than the first day of the plan year beginning on or after September 23, 2010.

The interim final regulations will take effect July 12, 2010.

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