Under the Affordable Care Act, when a plan covers dependent children, it must continue to make the coverage available until a child reaches the age of 26, even if the young adult is married, no longer lives with his or her parents, is not a dependent on a parent’s tax return, or is no longer a student. Applicable large employers should note that they may be liable for a pay or play penalty if they do not offer coverage to the dependent children of their full-time employees through the entire calendar month during which the dependent attains age 26.
Individual states may have dependent coverage requirements that are more favorable to employees. Employers and plan administrators should consult with their state insurance departments to determine if additional requirements apply to their plans.
Tax Treatment—Coverage Excluded from Income
The value of any employer-provided health coverage for an employee’s child is excluded from the employee’s income through the end of the taxable year in which the child turns 26. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. In addition to the exclusion from income of any employer contribution towards qualifying adult child coverage, employees may pay the employee portion of the health care coverage for an adult child on a pre-tax basis through an employer’s cafeteria plan.
Although not required under the law, some employers may decide to continue coverage beyond an adult child’s 26th birthday. In this case, the value of the employer-provided health coverage is excluded from the employee’s income for the entire taxable year in which the child turns 26. Thus, if a child turns 26 in March, but stays on the plan through Dec. 31 (the end of most people’s taxable year), all health benefits provided that year are excluded for income tax purposes.
The tax benefit also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
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