IRS Guidance on Health Coverage for Children Under Age 27


Health Reform Provisions

The Internal Revenue Service (IRS) issued Notice 2010-38, which provides guidance under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, (collectively, the Act) on the tax treatment of health coverage and medical reimbursements for children under age 27.  Taxpayers may rely on Notice 2010-38, pending the issuance of amended U.S. Treasury regulations.

Section 105(b) of the Internal Revenue Code generally excludes from an employee’s gross income employer-provided reimbursements made to an employee for the medical care of the employee, the employee’s spouse or the employee’s dependents.  Coverage under an employer-provided accident or health plan is excluded from an employee’s gross income under Code Section 106.  Effective March 30, 2010, the Act extended these exclusions to coverage under an employer-provided plan and to expenses incurred for the medical care of an employee’s child who has not attained age 27 as of the end of the taxable year.

Notice 2010-38 also clarifies the tax treatment of these dependent benefits under cafeteria plans, VEBAs and Section 401(h) accounts.

Your Next Moves

Cafeteria plans must be amended by December 31, 2010, in order to cover children under age 27 for the 2010 plan year.  Amendments for the 2011 and subsequent plan years should be made prospectively.  Employer sponsors of group health plans should analyze their current benefit plan design to determine whether they will extend health coverage to children under age 27 in the 2010 plan year or wait until 2011 to implement this change.

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