Adult Children Coverage Rules Issued
Regulations recently issued resolve numerous issues such as barring surcharges for that employers that extend health care coverage to employees’ adult children up to age 26.
That provision is part of the new health care reform law, which goes into effect on Jan. 1, 2011, for calendar-year plans.
The rules issued Monday by the Department of Labor, the Department of Health and Human Services and the Internal Revenue Service say that employers will not be allowed to impose a special surcharge for extending coverage to young adults.
This may surprise some since many in the insurance field hoped you could charge more for adult children. The regulations issued, state it very clearly, you cannot.
The rules do say that employees with older children who previously were “aged out” of coverage from the parent’s plan now must be given a new right to enroll with at least 30 days to make their decision. Sounds like more administration work for the benefits department. In addition, the regulations affirm that a child who previously lost coverage because of age and then opted for COBRA coverage can re-enroll in the parent’s heath care plan. Then, upon reaching age 26, the child could again take COBRA for up to 36 months. This sounds like a right to second period of COBRA coverage.
I appears that the new federal law, and the regulations issued also requires that coverage must be extended to the adult children up to age 26 regardless of whether the adult child is in school, married, lives at home or has any income. One point to consider related to the regulations that determine the last day a plan would have to extend coverage. The rule appears to be the day before the adult child’s 26th birthday. Under IRS regulations issued late last month, employers also can extend coverage until the end of the year in which the child turns 26 without any adverse tax consequences to the employee.
Most group plans now end coverage to employees’ children when they turn 18 or 19, if a full-time college student to 22 or 23.
Some Rules Issued are Creating Controversy
I have read that about one-third of employers will be subject to the major requirements of the new law. Many may face tax penalties because they offer health insurance plans that could be deemed, by the Internal Revenue Service, (the “IRS”) as unaffordable to some of their employees.
One study, by Mercer, a large national employee benefit consulting firm, reports that nearly 3,000 employers may face penalties. The report suggests that some overlooked provisions of the law could affect far more employers than Congress had intended.
A goal of the law, pushed through Congress by President Obama and Democratic leaders with no Republican support, is to give all Americans access to affordable insurance. In general, most employers thought the law required employers to offer coverage to employees or pay penalties, starting in 2014. Now further study reveals that some employers who do offer coverage, but requires their full-time employees to pay premiums, may also be penalized if that amount is more than 9.5 percent of the employee’s “household” income. If the coverage is deemed unaffordable the employer could face a penalty.
The Mercer study found that as many as one-third of employers had some workers for whom coverage might be deemed “unaffordable,” meaning that the employee’s share of the premium would be more than 9.5 percent of their household income in the absence of any federal assistance.
You should note that employers with fewer than 50 employees are generally exempt from many of the requirement and possible penalties. Larger employers are obliged to offer affordable coverage to full-time workers, defined as those who work at least 30 hours a week, on average. This being said, employers with more than 50 employees are more likely to offer unaffordable coverage than to offer no coverage at all, most large employers offer coverage as part if their compensation and benefit packages.
One concern I see with this new rule focuses on how difficult it would be for an employer to know in advance how many of their employees might find the health plan unaffordable. In my twenty-five years in compensation and benefit management it would be very rare for me to have access to employee household income information. Household income may include the earnings of a spouse or children, and interest from any savings or investments.
If an employer’s health plan is deemed unaffordable, the worker may qualify for a federal tax credit, or subsidy, to buy coverage in a new state-based marketplace known as an insurance exchange. A person claiming a credit must disclose income information to the exchange. The exchange will then notify employers if any of their workers qualify for subsidies. An employer offering unaffordable coverage is subject to a penalty of $3,000 a year for each full-time employee who gets government assistance to buy insurance in an exchange. The maximum penalty is $2,000 times the total number of full-time employees in excess of 30.
What this tells me to look out for is employers with low-wage work forces who run this risk of difficulties with the affordability requirement. Employers like retailers or restaurants with large numbers of low-wage workers may be most affected.
Also confusing is the definition of unaffordable. It is not entirely clear to me whether the government will look at the cost of coverage for an employee alone or the cost of family coverage or whichever is usually higher. We will have to wait until the Department of Labor (“DOL”) issues more regulations to explain what happens when a worker can afford individual but not family coverage.
There seems to be some common strategies emerging to avoid the penalties. Employers could respond in several ways. Employers could:
- Increase their plan contributions to premiums.
- Reduce the workers’ share of premiums but recoup the money in other ways — for example, by increasing co-payments or deductibles.
- Offer lower-cost health plans, with less generous coverage
- Charge lower premiums to workers with lower wages. Employers now often charge the same amount to all employees in the same health plan, regardless of their wages.
Here is one example I read. If an employer with 50 full-time employees and offers coverage but 10 of those employees receive premium credits, or subsidies, the employer would face a potential penalty of $30,000. If 30 workers receive subsidies, the penalty would be $40,000. Also to be considered is the provision under the law, which prohibits the employer from dismissing or discriminating against employees because they are receiving subsidies.
All this to create affordable health care. Sounds more like more administration and we should expect costs to go up.
For more regulatory fun, see the full regulations at www.dol.gov.
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