IRS Guidance on Expanded Definition of Dependent Child for Health Plan Purposes May Require Employers to Take Immediate Action

04 May 2010 Publication
Author(s): Samuel F. Hoffman Leigh C. Riley Harvey A. Kurtz Greg W. Renz

Legal News Alert: Taxation

One of the changes made by the Patient Protection and Affordable Care Act (PPACA) that has received a great deal of attention is the required coverage for adult children until age 26, which is effective for plan years beginning on or after September 23, 2010. A separate revision that may require more immediate attention is the expansion of the definition of dependents that can be covered under an employer’s group health plan on a non-taxable basis effective March 30, 2010. In IRS Notice 2010-38, released April 28, 2010, the IRS has provided guidance on the effect of this revision. The guidance highlights that some employers may need to take action now as a result of this change.

Prior to March 30, 2010, the Internal Revenue Code contained a special definition of a “dependent child” in Section 105 for group health plan purposes. This definition required the dependent child to be under age 19 or under age 24 if a student, and to meet some (but not all) of the requirements to be a tax dependent of the enrolled parent-employee. Specifically, the child had to be considered a tax dependent of the parent-employee under Internal Revenue Code Section 152, without regard to subsections (b)(1), (b)(2), and (d)(1)(B).

If an enrolled child of an employee met this definition, then:

  • The health care benefits paid for the dependent child under the employer’s group health plan are non-taxable
  • The health care expenses incurred by the dependent child are reimbursable on a non-taxable basis from a medical flexible spending account plan
  • The employee-parent could pay for the dependent child’s coverage on a pre-tax basis through the employer’s Internal Revenue Code Section 125 cafeteria plan
  • The employer’s payment of premiums or contributions for the dependent child’s group health plan coverage are non-taxable to the parent-employee

Effective March 30, 2010, PPACA added a second type of dependent child to Internal Revenue Code Section 105 that may now be covered under a group health plan on the same non-taxable basis — any son, daughter, stepson, stepdaughter, eligible foster child, or adopted child of the employee who is age 26 or younger for the entire calendar year (a PPACA Dependent Child). Notably, this definition is much broader than the prior definition and thus allows greater non-taxable coverage for an employee’s children under his/her employer’s health plans.

Affect on Medical Plans
The first step an employer should take is to review its definition of dependent child in its group health plans to determine whether the plan by its terms automatically covers a PPACA Dependent Child effective March 30, 2010. As seen in the chart below, plans can define “dependents” in any number of ways. How the plan currently defines a dependent will dictate whether a PPACA Dependent Child is automatically covered by the plan or not:

Definition of Dependent

PPACA Dependent Child Automatically Covered on March 30, 2010

Dependent within the meaning of Code Section 152


Dependent within the meaning of Code Section 105(b)


Children of participant who are considered eligible under Code Section 105(b)


Once the employer determines whether a PPACA Dependent Child is or is not automatically covered by its group health plans, the next step an employer should take is to determine whether this is the result the employer wants. For example, an employer’s medical flexible spending account may permit participants to submit expenses for dependents (within the meaning of Code Section 152) for reimbursement. Based on this language, an employee could not submit expenses for a PPACA Dependent Child who does not otherwise satisfy the requirements of Code Section 152. If the employer wishes to allow employees to be reimbursed for the claims incurred by a PPACA Dependent Child, then the medical flexible spending account plan should be so amended, and notice given to participants of the change. In Notice 2010-38, the IRS permits employers to retroactively amend their cafeteria plans to expand coverage to a PPACA Dependent Child, provided the amendment is adopted no later than December 31, 2010.

If the group health plan either automatically covers the PPACA Dependent Child or the employer decides to amend the plan to cover the PPACA Dependent Child, an employer also should consider whether to permit participants to make a corresponding election change under the employer’s Code Section 125 cafeteria plan. In Notice 2010-38, the IRS states that it intends to amend the Code Section 125 regulations to permit an election change in this circumstance, retroactive to March 30, 2010.

Making election changes available could be important to participants. For example, a participant may wish to increase his or her contributions to a medical flexible spending account if expenses of his or her PPACA Dependent Child can now be reimbursed. Of course, only expenses incurred by a PPACA Dependent Child on or after March 30, 2010 would be eligible for reimbursement. Or, an employer may already be covering older children under its fully insured group health plans as a result of state law insurance mandates, but has been deducting premiums for such coverage from the employee’s pay on an after-tax basis. As a result of the PPACA change, such an employer can now allow the employee to pay for such coverage on a pre-tax basis for so long as the older child remains a PPACA Dependent Child.

Most Section 125 cafeteria plans contain a rule that any “change in status event” election be made within 30 days of the event. In this case, the event could be considered to have occurred on March 30, 2010 when the law changed, with the result that the 30-day election window is already closed. However, the 30-day election window is not a requirement of Code Section 125. As such, an employer could choose to amend its plan to provide an extended election window to accommodate this change.

Employers should keep in mind that the change to the tax rules described in this article applies for federal tax purposes only, and are advised to consult tax counsel regarding the effect of any plan changes on state taxes.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:

Leigh C. Riley
Milwaukee, Wisconsin

Samuel F. Hoffman
San Diego, California

Harvey A. Kurtz
Milwaukee, Wisconsin

Greg W. Renz
Milwaukee, Wisconsin

Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.

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