CHERNOFF DIAMONDBenefits and Risk Management Consultants

May, 2010

The Affordable Care Act (ACA)Covering Dependents To Age 26

Session Moderator

Ralph Sepe - Partner

Session Presenter

• Jill Bergman, CEBS - Compliance Manager, Health & Welfare Services

• Webinar Guidelines

• Muted phone lines during the presentation

• Polling questions and asking questions

• Presentation materials will be made available

• Copy of the slides and Questions and Answers from the audience

Today’s Presentation

• What the law says – benefit provisions

• Interim final regulations issued May 13

• Effective date and eligibility criteria

• Insurance carrier reaction

• Changes to the tax code

• How benefit provisions are treated under the tax code

• It’s not that scary and can make things a little easier!

• IRS issues guidance - Notice 2010-38

• How the federal law coordinates with state mandates

• Employer action steps

Today’s AgendaCovering Dependents To Age 26

• Plans that cover dependent children must provide coverage up to age 26

• Regardless of status

• Student, marital, disabled, tax dependent, residency, or employment

• Dependent is defined in terms of the relationship between the child and participant

• No definition of “child” in the benefit regulations

• Not required to extend coverage to dependents of dependents

• Treat as special enrollee under HIPAA

• Offer same benefits as “similarly situated” individuals

• Cannot charge more for coverage

• Eliminates student verification and Michelle’s Law

The RequirementsWhat The Law and Interim Regulations State

• Plan years beginning on or after September 23, 2010

• October 1, 2010 - earliest date

• January 1, 2011 - calendar year plans

• September 1, 2011 - latest date

• Fully insured and self-funded plans

• Small and large plans

The RequirementsWhen The Provision Becomes Effective

• Special enrollment period at implementation

• Extend to those not currently covered

• COBRA beneficiaries (former employees and young adults)

• As a separate “young adult” contract under state insurance law

• Written notice not later than first day of the implementation plan year

• With open enrollment materials

• Statement must be “prominent”

• Allowed to be provided to the parent

• Must last at least 30 days

• Coverage would begin on first day of the plan year

The RequirementsImplementing The Law

• Grandfathered plans (up to 2014)

• In existence on date of enactment - March 23, 2010

• Can exclude if eligible to enroll in an employer-sponsored plan other than that of the parents

• Own employer coverage

• Spouse employer coverage

• Adopting required changes will not cause a plan to lose “grandfathered status”

• Secretary of Health & Human Services to issue final regulations

• 90 day public comment period through August 11, 2010

• Binding regulations as far in advance of September 23

The RequirementsWhat The Law And Interim Regulations State

• Self-funded and fully insured plans

• Mandatory coverage does not appear to apply to “excepted benefits”

• Dental and vision

• Provided under separate policy, certificate or contract of insurance

• Flexible spending accounts

• Employer option

• Certain carriers are making this available

• Exemption for small groups with fewer than 2 employee participants

• Appears that “retiree medical” plans would be exempt from mandate

• Tax changes apply to “excepted benefits” and retiree medical plans

The RequirementsWhat Plans Are Impacted?

• Eliminate coverage gap for adult children “aging off” parent’s plan

• Graduating seniors (loss of student status)

• Carriers will maintain coverage for certain dependents

• Already must be covered (a dependent) under the plan

• May 1 and June 1 effective dates

• Group size implications – automatic, opt out of early adoption?

• Each carrier is determining

• Process, procedures, restrictions, employee communications, and cost

• Some applying “grandfather provision”

• Self-funded plans have option to adopt early

The Insurance Community ReactionWhat They Will Do

Effective March 30, 2010

• §105 – Employer-provided coverage is excluded from employee’s income

• §106 – Employer contributions are excluded from income

• §125 - Allows coverage to be paid for on a pre-tax basis (premium only plan)

• Make pre-tax contributions to an FSA (salary reduction)

• §152 - Dependent definition - ACA refers to certain sections to define a dependent

• Applies to medical, dental, vision, FSAs, HRAs

• The law did not amend IRC §223 that governs Health Savings Accounts (HSAs)

• Until further guidance is issued or clarifying amendments

• Expenses for adult children should not be reimbursed through an HSA

The Tax Code ChangesWhat Changed?

• Tax code allows “favorable tax treatment” for medical care

• Employee, spouse or dependents

• Favorable tax treatment is now extended to cover adult children

• Do not have to include the value of the benefit as income

• Not included as FICA or FUTA wages

• Reimbursement under FSAs and HRAs for qualified medical expenses

• The law did not modify domestic partner tax status

The Tax Code ChangesWhat Does This Mean?

• Tax-favored status for a dependent child who has:

• Not attained age 27 at any time during the employee’s taxable year

• Employers may assume the calendar year

• Employers can rely on employee’s representation of child’s birth date

• A “child” for tax-favored health care benefits

• Son, daughter, step or foster child, adopted or placed for adoption

• Does not have to be claimed as a dependent on the parent’s tax return

• Residency and other support requirements do not apply

• Allowed to earn income

• Simple test – is the child 26 on December 31?

The Tax Code ChangesWhat Does This Mean?

• Dependent child turns 26 on October 1, 2011

• Remain a dependent under the plan until September 30, 2011

• On December 31, 2011 the child is age 26 (and 3 months)

• Tax-favored benefits for the entire 2011 calendar year

• Includes FSA and HRA reimbursements

• October 1, 2011 – December 31, 2011

• Dependent child turns 27 on October 1, 2012

• There are no tax-favored benefits allowed for all of 2012

• Includes FSA and HRA reimbursements

REMEMBER THIS WHEN WE DISCUSS COORDINATION WITH STATE PLANS

The Tax Code ChangesExample - What Does This Mean?

• Department of Treasury will modify “change-in-status” rules

• Retroactive to March 30, 2010 for adult dependent children who:

• Become eligible for coverage, or

• Remain eligible beyond the original coverage expiration date

• Allow employees to make changes to pre-tax elections under IRC §125

• Enroll adult dependent children and change FSA elections

• Transition rule for cafeteria plan amendments (IRC §125)

• Current law only permits prospective amendments

• EXCEPTION - Can make election changes prior to amending the plan

• Amend the plan no later than December 31, 2010

The Tax Code ChangesTying Up Loose Ends

1. John is 24, lives at home, earns a living, and has no benefits from work

2. Mary is 25, a part-time student, lives on her own in another state and has a part-time job with no benefits

3. Kevin is 23, married with 2 children, works 2 jobs with no benefits and has a home of his own. His spouse does not work

• Kevin’s spouse and children do not have to be offered coverage

4. Same as 3 except Kevin’s spouse works and has employer-sponsored coverage

• If Kevin’s parent’s plan is “grandfathered”, do not have to offer coverage

5. Sally is 19, lives at home, is unemployed, uneducated and unmotivated

All examples assume the individual meets the definition of a child for this purpose

Who Are They? Examples – Adult Children Dependents

• Numerous states have mandates that extend coverage to young adult dependents

• States with extended coverage*

• Age 26 - Connecticut, Florida, Illinois, Massachusetts, New Hampshire, Utah

• Age 26+ - Nebraska, New Jersey, New York, Ohio, Wisconsin

• States have their own rules

• Eligibility and length of coverage (i.e. birth date or end of calendar year)

• Cost determination

• Dependent or “separate individual” coverage

• State tax implications may be different than federal tax rules*Kaiser State Health Facts as of January 1, 2010

Coordinating Federal and State MandatesWhat Are The Issues?

• State mandates only apply to insured plans

• Up to age 26

• Law with the least employee restrictions will prevail

• State insurance law cannot prevent the application of federal law

• Age 26 and beyond

• Federal requirement ends

• Adult child is subject to state eligibility requirements

• Typical state requirements

• Unmarried, full-time student or resident, not eligible for other coverage

Coordinating Federal and State MandatesWhat Are The Issues?

• State provides coverage through age 29

• Eligibility requirements

• Unmarried

• Live work or reside in the service area of the insurer

• Not eligible for other coverage

• Assume the mandate for under two scenarios

• Option 1 - Young Adult - separate contract and pay full cost of single coverage

• Option 2 – Make Available - dependent under family coverage

• Assume HMO (local service area)

• Plan Year is June 1

Coordinating Federal and State MandatesExample – New York

1. John is 24, lives at home, earns a living, and has no benefits from work

2. Mary is 25, a part-time student, lives on her own in another state and has a part-time job with no benefits

3. Kevin is 23, married with 2 children, works 2 jobs with no benefits and has a home of his own. His spouse does not work

• Kevin’s spouse and children do not have to be offered coverage

4. Same as 3 except Kevin’s spouse works and has employer-sponsored coverage

• If Kevin’s parent’s plan is “grandfathered”, do not have to offer coverage

5. Sally is 19, lives at home, is unemployed, uneducated and unmotivated

All examples assume the individual meets the child definition until age 26 and there is no change in circumstances noted above

Coordinating Federal and State MandatesEligible for New York Coverage Beginning At Age 26

• John turns 26 on October 1, 2011

• Covered as a dependent (family coverage) until September 30, 2011

• Federal mandate

• The cost and benefits are tax-favored benefits

• October 1, 2011 continues as a Young Adult

• Individual coverage & pay single premium with after-tax dollars

• Tax treatment for the remainder of 2011 is unclear

Coordinating Federal and State MandatesExample – Option 1

• John turns 26 on October 1, 2011

• Covered as a dependent (family coverage) until September 30, 2011

• The cost and benefits are tax-favored benefits

• October 1, 2011 continues as a dependent under the state mandate

• Family coverage

• Tax-favored treatment through December 31, 2011

• January 1, 2012

• Prior to the next open enrollment (June 1, 2012) – change in status

• Pay the share of the cost with after-tax dollars

• Impute the value of the benefit as income to John’s parent

Coordinating Federal and State MandatesExample – Option 2

• Know when the law applies to your plans

• Adult children become eligible at open enrollment

• Must be at least 30 day election period

• Which plans are affected?

• Medical, dental, vision

• Will you require documentation?

• Explain the key elements

• Eligibility criteria

• Cost and tax-favored status

• Understand when the benefit will end and alternatives available at that time

Employer Action StepsCommunicating Changes To Employees

• Know the effective date and specific early adoption provisions

• Do you have a choice?

• How is the insurance carrier communicating to you and/or members?

• What, if any, action an employee will need to take to maintain coverage for dependents who would otherwise lose coverage

• What, if any, will be the additional cost to continue coverage earlier than required

• Apply to everyone in the affected tiers

• Explain why certain dependents cannot come on the plan sooner than the required implementation date

• Preventing a gap for those already covered as dependents

Employer Action StepsFully Insured Plans

• Review plan documents

• Dependent definitions may need to be updated

• Eliminate reference to full-time student, marital or tax dependent status

• Section 125 Cafeteria Plans

• Must be amended no later than December 31, 2010

• Pay for young adult dependents with pre-tax dollars

• Change elections - Add to plan or continue coverage (change in status)

• Allow FSA (and HRA) reimbursable expenses

• Stop imputing income beginning March 30, 2010 where applicable

• State mandates with young adult coverage

Employer Action StepsPlan Documents, Amendments and Other Requirements

QUESTIONS