IRS Guidance on Tax-Free Coverage for Children under Age 27
Posted on: February 17, 2015Categories: HR & ComplianceThe Affordable Care Act (ACA) requires group health plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. This adult child coverage mandate became effective for plan years beginning on or after Sept. 23, 2010.
The ACA also provides for favorable tax treatment for coverage of adult children. Under the ACA, the value of health coverage provided for an employee’s child who is under 27 years of age is not subject to federal tax for the employee or the dependent, effective March 30, 2010.
The Internal Revenue Service (IRS) issued Notice 2010-38 to provide guidance on the favorable tax treatment for health coverage of dependent children up to age 27.
Who is Eligible For the Tax Benefit?
This expanded health care tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
Employees who have children who will not have reached age 27 by the end of the taxable year are eligible for the tax benefit beginning on 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. This allows children to remain on their parents’ coverage, tax-free, until the end of the calendar year in which the child turned age 26.
For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes. For purposes of the tax exclusion, employers may rely on information provided by the employee about his or her child’s date of birth.
Tax Treatment
Coverage and reimbursements under a health plan for dependent children who are under age 27 at the end of the taxable year are exempt from federal income tax withholding and are also excluded from wages for FICA and FUTA tax purposes. All state tax laws now conform to the federal tax law on dependent coverage of children up to age 27. However, if state laws require coverage past age 26, taxes may apply to the coverage.
Cafeteria Plans
The tax law change allows 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 make pretax contributions to pay for coverage of dependent children up to age 27.
Although, as a general rule, cafeteria plan amendments must be made prospectively, the Notice created a transition period for cafeteria plan amendments. The transition period allowed employers with cafeteria plans to permit employees to make pretax salary reduction contributions to provide coverage for children under age 27 during 2010, even if the cafeteria plans had not yet been amended to cover these individuals. Plan sponsors then had until the end of 2010 to amend their cafeteria plan language to incorporate this change.
Health FSAs, HRAs and HSAs
The dependent coverage tax benefit applies to dependent coverage under a health flexible spending account (FSA) and a health reimbursement account (HRA). Effective March 30, 2010, an employee participating in a health FSA or HRA may exclude from his or her gross income the value of coverage and reimbursements provided for an adult child who is under age 27 at the end of the employee’s taxable year.
This change does not apply to HSAs. To qualify as a dependent child for HSA tax-free reimbursement purposes, the age limit is generally 19, unless the dependent is a full-time student.
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