More on Health Care Reform and Your Cafeteria Plan

IRS Issues Guidance on Health Care Coverage for Young Adults Under Age 27

Just last week, the IRS issued guidance on the tax treatment of health care coverage for children under age 27 that provides additional information on the changes made by the Patient Protection and Affordable Care Act (PPACA). The agency's Notice 2010-38 states that employers with cafeteria plans may permit employees to immediately make pre-tax salary reduction contributions to provide coverage on their plans for their children who are young adults. These changes immediately allow employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This applies 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.

Please note that you do not need to make this available until next year. If you decide to cover these dependents this year-pick a date that is the start of the month and document it with an employee notice. Pacific Benefit Consultants, Inc., will be posting a sample Summary of Material Modifications for our clients to use on our website later this year. Please watch for the announcement and instructions.

Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit beginning 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 after March 30, 2010. 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.

Clarification on over-the-counter drugs (OTC) and medicines for 2011

As the dust starts to settle under health care reform and more detailed interpretations are forthcoming there are some unexpected results. Contrary to what was originally thought over-the-counter drugs and medicines will not be covered without a prescription beginning January 1, 2011, regardless of the plan year.

It was originally thought that plans that straddled January 1, 2011 would be able to cover over-the-counter drugs and medicines for the full plan year. What this now means is that your plan can only cover over-the-counter drugs and medicines without a prescription until December 31, 2010.

There are still planning opportunities with over-the-counter drugs and medicines but some advance planning will need to be done. Please direct your employees to the Employee Bulletin on our website at www.pacificbenefits.com.

We will continue to keep you informed as health care reform continues to unfold.