The health care reform package makes two important changes to insurance coverage for young adults. First, the new law allows young adults to remain on their parents’ health insurance plan until age 26. Second, the new law extends certain favorable tax treatment to coverage for young adults.

Extended coverage

Traditionally, many plans and insurers would remove adult children from their parents’ policies because of age, status as a student, or residence. Under the new law, plans and insurers that offer dependent coverage must offer coverage to an enrollee’s adult children until age 26, even if the young adult no longer lives with his or her parents, is not a dependent on a parent’s federal tax return or is no longer a student. Married and unmarried young adults are covered but not their children.

Let’s look at an example:

Anita is 22 years old, is a full-time student and expects to graduate from college school in 2011. Anita is covered by her mother’s employer-provided health insurance. Before the new law, the plan would have terminated coverage for Anita after her 23rd birthday or when she graduated from college, whichever came first. The health care reform package requires the plan to make coverage available until Anita reaches age 26.

The expansion up to age 26 is effective for plan years beginning on or after September 23, 2010. Many insurance companies have agreed to implement the new requirement before the effective date. These insurance companies will voluntarily continue coverage for young adults with no break in coverage.

Keep in mind that the new law does not compel a plan or insurer to offer dependent coverage. But if a plan does offer dependent coverage, the new law requires such plans to extend that coverage until a child reaches age 26.

There is one important exception. If a young adult is eligible to obtain health insurance from his or her employer, the parent’s plan is not obligated to extend coverage to age 26. This exception is temporary: starting in 2014, children up to age 26 can stay on their parent’s employer plan even if their own employer offers coverage.

Income tax exclusion

Before passage of the health care reform package, employer-provided health insurance coverage was generally excluded from income if the employee’s child was under age 19 or under age 24 if a student. The new law extends the income tax exclusion to any employee’s child who has not attained age 27 as of the end of the tax year. For most individuals, this is the calendar year. Although a health plan will be required to cover a dependent up to age 26, the plan may be more generous and provide for coverage through the end of the year in which the adult child celebrates his or her 26th birthday.

Under the new law, it is also no longer necessary for the child of the employee to be a dependent of the employee for the income tax exclusion to apply. A child for purposes of the extended exclusion is an individual who is the son, daughter, stepson, or stepdaughter of the employee. The definition of child also includes adopted children and eligible foster children.

Let’s look at an example:

Amy works for ABC Co. which provides health care coverage for its employees and their spouses and for any employee’s child who has not attained age 27 as of the end of the tax year. For the 2010 tax year, ABC provides health care coverage to Amy and her son Jason, who will not attain age 27 until after the end of the 2010 tax year. The health care reform package treats Jason as a child of Amy. Accordingly, and because Jason will not attain age 27 during the 2010 tax year, the health care coverage for Jason under ABC’s plan is excluded from Amy’s gross income.

The IRS and other federal agencies have published guidance about all the changes affecting young adults in the health care reform package. Employers, plans and insurers are also alerting taxpayers about the changes. Please contact our office if you have any questions.

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