No Tax Hit for Covering 20-Yr-Olds

Filed under: Work Life, In The News


WASHINGTON (AP) - President Barack Obama is pushing to speed up insurance coverage for young adults in their twenties -- one of the most anticipated early benefits of his new health care law.

Starting this year, the law allows young adults to stay on their parent's plan until they turn 26, which addresses a major worry for families with children transitioning from school to work in an uncertain economy. But a surprising amount of fine print has complicated what seemed like a simple solution.

Now, the administration is trying to remove roadblocks by working with employers and insurance companies.

A senior administration official told The Associated Press that the Treasury Department will issue a clarification Tuesday reassuring employers that neither they nor their workers will face a tax hit if companies extend benefits immediately. The official spoke on condition of anonymity because the announcement had not been made.

The extended coverage will be available under the law after Sept. 23. But some employers weighing whether to offer it immediately were wondering if they'd have to withhold additional federal taxes from parents to cover the value of the benefit.

Last week, several major national insurers announced they would move up the effective date of the extension so recent graduates or those with a birthday in 2010 don't experience a break in coverage. The industry move came after Health and Human Services Secretary Kathleen Sebelius worked behind the scenes to encourage the companies individually to act.

Despite the administration's efforts, some families may have to wait until 2011 to get their kids covered, particularly if the parents are working for a large employer, benefits experts say.

Employers are also trying to figure out how to price the coverage. There could be sizable differences in cost.

With college graduations just weeks away - and the economy still uncertain - the No. 1 inquiry corporate benefit managers are getting from employees is how they can keep their adult children on the company plan, said Paul Dennett, vice president for health reform at the American Benefits Council.

"I think there are a few questions that need to be clarified so people can make sure if they're making the right decision, and they do it in the right way," Dennett said. His group represents human resources departments.

Currently, the age at which young adults lose parental coverage varies widely. Most plans cover dependents until they graduate from college, but many kids don't go to college. An estimated 485,000 young adults would gain coverage from the provision, a much touted early benefit of the new law.

"Expanding the opportunity for younger Americans to get insurance coverage is a top priority for the administration," Sebelius said. "This is a group of people who have traditionally either been unable to afford coverage or have not had access to it."

However, under the health care overhaul law, there may be a lag in when employers start to offer the new benefit.

That's because the law says the coverage extension is effective for the first plan year on or after Sept. 23. For most company plans, the new plan year doesn't start until Jan. 1, 2011. Some young adults currently insured could experience a break in coverage.

"Most employer plans are on a calendar-year date," Dennett said. "For most employers, this requirement will take effect Jan. 1, 2011."

If figuring out the effective date of the new benefit turned out to be tricky, issues of taxation and costs are more complicated.

Workplace health insurance is tax-free to the worker, and tax-deductible for the employer. The overhaul law applies that principle to new benefits such as the coverage extension. But employers considering immediate action ahead of the Sept. 23 effective date were concerned that would prompt the IRS to deem the value of the coverage taxable income. The Treasury announcement Tuesday was aimed at erasing that concern.

That still leaves one major issue: How employers will charge for the new coverage. They could spread the cost across their entire pool of employees with family coverage. Or they could charge families that elect to cover their young adults a separate premium, likely higher.

"There is no free lunch, so there will be an incremental cost," said Ron Fontanetta, a principal with the consulting firm TowersWatson. He believes a majority of employers will keep things simple and raise overall family premiums modestly. But it may still be noticeable - 5 percent to 10 percent.

Copyright 2010 The Associated Press. The information contained in the AP news report may not be published, broadcast, rewritten or otherwise distributed without the prior written authority of The Associated Press. All active hyperlinks have been inserted by AOL. This article was written by RICARDO ALONSO-ZALDIVAR, Associated Press Writer.

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