This week, the IRS issued guidance on the tax treatment of health care coverage for children under age 27 that provides additional information on the changes made by the Patient Protection and Affordable Care Act (PPACA). IRS Notice 2010-38 states that employers with cafeteria plans may permit employees, effective immediately, to make pre-tax salary reduction contributions to provide coverage on their plans for their children who are young adults. These changes allow employers with cafeteria plans―plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits―to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This applies even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.
Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit beginning March 30, 2010 if the children are already covered under the employer’s plan or are added to the employer’s plan at any time after March 30, 2010. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age-27 standard replaces the lower age limit (23) that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.
In comments to a D.C. Bar Association Tax Section Exempt Organizations Committee gathering this week, Treasury Department deputy benefits tax counsel Helen Morrision said that, “The tax rule provides that as long as the child was not age 26 prior to the end of the year, that the coverage would be excluded.” Even if the child turns 26 and the plan is not required to cover the child beyond that date, the income exclusion rules would continue to apply if the plan chooses to continue the coverage through the rest of the year, she said. Some questioned why the IRS notice dealt with coverage of children up to age 27 when the coverage provision under the health care reform law only requires coverage through age 26.
Morrison said that Congress’s intent was to assure that if a plan decided it would make more sense to continue to cover the child through the end of the year, the employees would not have a partial year of income inclusion.
