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Manley Services Employer Bulletin
June 7, 2010
New IRS Rule: Tax Treatment of Healthcare Benefits for Children Under Age 27
The IRS has issued Notice 2010-38 in response to the recently enacted Patient Protection and Affordable Care Act (PPACA) and Health Care and Education Reconciliation Act of 2010 (HCERA). This notice gives guidance regarding the tax treatment of employer provided health benefits for young adults under age 27. PPACA, as amended by HCERA, places the requirement on employer sponsored health plans to provide benefits to young adults who may no longer qualify as tax dependents (including children, stepchildren, legally adopted individuals, and eligible foster children) beginning the first day of the first plan year on or after September 23, 2010. However, employer groups may amend their FSA and HRA plans to allow qualified expenses for these young adults effective any time after March 30, 2010, the date HCERA was signed.
Though plan amendments are normally required to be in place prior to the change becoming effective, the IRS has made the exception to allow this amendment to be retroactive. The amendment must be in place by December 31, 2010.
This new requirement is effective January 1, 2011, and all plan documents will be revised or amended at that time to include this change. You may begin administering this change effective any time after March 30, 2010 as long as the retroactive amendment is in place by December 31, 2010. If you intend to amend your plan, please contact your account service representative.
From the IRS Bulletin:
VII. TRANSITION RULE FOR CAFETERIA PLAN AMENDMENTS
Cafeteria plans may need to be amended to include employees' children who have not attained age 27 as of the end of the taxable year. Pursuant to §1.125-1(c) of the proposed regulations, cafeteria plan amendments may be effective only prospectively. Notwithstanding this general rule, as of March 30, 2010, employers may permit employees to immediately make pre-tax salary reduction contributions for accident or health benefits under a cafeteria plan (including a health FSA) for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. However, a retroactive amendment to a cafeteria plan to cover children under age 27 must be made no later than December 31, 2010, and must be effective retroactively to the first date in 2010 when employees are permitted to make pre-tax salary reduction contributions to cover children under age 27 (but in no event before March 30, 2010).
Questions?
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This document is intended to provide our customers with general information regarding the American Recovery and Reinvestment Act. This document does not constitute legal or compliance advice, and you should consult your own legal counsel for specific guidance.