WASHINGTON
— As a result of changes made by the recently enacted Affordable Care Act,
health coverage provided for an employee's children under 27 years of age is now
generally tax-free to the employee, effective March 30, 2010.
The
Internal Revenue Service announced today that these changes immediately 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.
IRS Notice
2010-38 explains these changes and provides further guidance to employers,
employees, health insurers and other interested taxpayers.
“These
changes give employers a unique opportunity to offer a worthwhile benefit to their
employees,” IRS Commissioner Doug Shulman said. “We want to make it
as easy as possible for employers to quickly implement this change and extend
health coverage on a tax-favored basis to older children of their employees.”
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 year are
eligible for the new tax benefit from March 30, 2010, forward, if the children
are already covered under the employer’s plan or are added to the employer’s
plan at any time. 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 limits that applied under prior tax law, as well as the requirement
that a child generally qualify as a dependent for tax purposes.
The
notice says that employers with cafeteria plans may permit employees to immediately
make pre-tax salary reduction contributions to provide coverage for children under
age 27, 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.
In addition to changing the
tax rules as described above, the Affordable Care Act also requires plans that
provide dependent coverage of children to continue to make the coverage available
for an adult child until the child turns age 26. The extended coverage must be
provided not later than plan years beginning on or after Sept. 23, 2010. The favorable
tax treatment described in the notice applies to that extended coverage.
Information
on
other health care provisions can be found on this website, IRS.gov.
