IRS PROVIDES CLARIFICATION REGARDING THE PATIENT PROTECTION AND AFFORDABLE CARE ACT

The Internal Revenue Service has issued guidance on the favorable tax treatment of health care coverage for employees’ nondependent adult children, to whom such coverage was extended under the Patient Protection and Affordable Care Act (“Patient Protection Act”). The Patient Protection Act requires that employer group health plans that provide for dependent coverage must continue to make such coverage available to employees’ adult children until age 26, regardless of the child’s student status and regardless of whether that child meets the definition of “dependent” under Sec. 152 of the Tax Code. This requirement is effective for plan years beginning on or after Sept. 23, 2010 (thus, for calendar year plans, starting with the plan year that begins Jan. 1, 2011). The favorable tax treatment addressed in Notice 2010-38 is effective as of March 30, 2010, and applies to covered nondependent adult children who do not turn age 27 during the employee’s tax year. Employers may rely on what an employee tells them as to the adult child’s date of birth.

(...continued)

(...continued from previous page)

What Notice 2010-38 does is to permit this favorable tax treatment to apply beginning March 30, 2010, to employees in plans that had already allowed coverage of nondependent adult children, but which were imputing income to employees to account for the coverage. It also permits the favorable tax treatment for plans that voluntarily expand coverage to nondependent adult children in advance of the date required by the Patient Protection Act.

The clarifications and guidance in IRS Notice 2010-38 include the following:

• An adult child who is employed elsewhere, and who is eligible for coverage through that employer but declines it, still may be covered on a tax-free basis under a parent’s plan, so long as he or she has not turned age 27 by the end of the year. (Note that the Patient Protection Act grandfathers plans in existence on March 23, 2010, so that these plans are not required to offer coverage to adult children who are eligible for coverage at their current employer. If a plan chooses to extend coverage to these individuals, the coverage is tax-free to the employee so long as the child has not turned 27 in the tax year.)
• An adult child who is married still may be covered on a tax-free basis under a parent’s plan, so long as he or she has not turned age 27 by the end of the year. If the adult child’s spouse also were covered, that coverage would not receive the favorable tax treatment, and the employer would be required to impute income to the employee reflecting the value of the spouse’s coverage.
• The exclusion applies to employee pre-tax contributions for health plan coverage under a cafeteria plan, as well as to health plan flexible spending account reimbursements and to employer-provided health reimbursement arrangements (HRAs). The notice states that the IRS will be amending cafeteria plan election change regulations retroactively to March 30 to allow changes for adult children under age 27 becoming newly eligible for coverage, or becoming eligible for coverage beyond the date the adult child otherwise would have lost it. Thus, a plan that chooses to allow employees to cover nondependent adult children in 2010 can permit employees to make election changes in order to do this on a pre-tax basis, or to make an FSA change to reflect the addition of the adult child. Employers that opt for this must amend plans by Dec. 31, 2010, to reflect this change.
• As noted above, for purposes of the tax exclusion, the adult child need not be a “dependent” of the employee. “Child” means an individual who is a son, daughter, stepson, stepdaughter, legally adopted individual, individual placed with the employee for adoption, or foster child.

Consult with our plan providers and benefits professionals to help determine the plan amendments and communications necessary to comply with the Patient Protection Act and to ensure employees receive the favorable tax treatment for coverage of nondependent adult children now provided by the Tax Code.

CONFUSED BY HEALTHCARE REFORM? THE IRS ISSUES CAFETERIA PLAN GUIDANCE

Cafeteria plans are being altered at most companies thanks to the new rules issued by the Internal Revenue Service. If employees enroll their eligible dependents on their health insurance plans, the new cafeteria plan rules allow those employees to make immediate tax-free contributions.

According to the IRS Commissioner Doug Shulman, this change was made necessary by the new federal healthcare legislation, which was passed on March 30th, 2010. The commissioner stated that the changes give companies and businesses the chance to offer a benefit that was worth their employees’ while. He further stated that the IRS was prepared to make it as easy as possible for the new changes to be implemented and to include older children of employees in those employees’ tax-favored benefit plans.

Cafeteria plans are tax-favored insurance plans that allow employees to choose from a “cafeteria” of tax-free benefits, cash or taxable benefits.

Notice 2010-38 was issued by the IRS in order to fully explain and interpret the changes. In addition, the notice was designed to provide direction to employers, employees, insurers and other miscellaneous taxpayers.

The expanded tax benefit applies to group insurance plans for active employees and retirees, as well as self-employed workers. Self-employed workers can take advantage of this benefit if they qualify for the self-employed health insurance tax deduction.

Employees’ children who will not reach the age of 27 by the end of the current year qualify for the tax benefit starting from March 30th of this year. It makes no difference whether the children are already covered under the employer’s plan or added at a later date.

For the purposes of this new benefit, the child category includes a son, daughter, stepchild, adopted child or a qualifying foster child. This standard for the age of the child officially replaces the relevant age limits under prior federal tax law; additionally, the old requirement that a child qualifies as a dependent for tax filings is also superseded by this law.

Finally, the notice also states that cafeteria plans provided by employers can now allow employees to start making tax-free contributions for their children’s health insurance coverage even if the cafeteria plan has yet to be amended. Sponsors of plans have until the end of 2010 to amend their plans.

AMERICANS NEED EDUCATION TO UNDERSTAND EVIDENCE-BASED MEDICINE

Evidence-based medicine (EBM) is an approach to medical care which claims that the best way to decide on medical treatments and/or practices is to continually defer to the best scientific evidence available. EBM is primarily meant to be used as a decision-making model when analyzing the best form of care for the patient. This approach supposedly integrates firsthand clinical experience with outside scientific evidence from clinical trials in order to craft the best available pool of information.

The merits or dangers of evidence-based medicine notwithstanding, a recent study published on the website of the journal Health Affairs suggests that additional education on the consumer front is necessary before more Americans will accept the practice. The study was conducted between August of 2006 and December of 2007 and collected data based on popular consumer-oriented methods such as focus groups, online surveys and interviews. The team conducting the research project also interviewed a number of professionals, specifically forty employer intermediaries like human resources staff.

Since the recent healthcare reform law includes encouragement of evidence-based medicine, the release of this study is particularly timely. The majority of the participants in the focus groups stated a belief that EBM would impinge upon the patient’s freedom to choose treatment and result in medical practices becoming artificially rigid and unresponsive to patient needs. These participants wanted the freedom to make choices about their healthcare using both their physician’s judgment and their own about quality of care.

One notable participant even went on record as saying that evidence-based medicine was a method of protecting doctors from medical malpractice liability. Obviously, such a negative denial indicates that consumer education must become a significant priority for advocates of EMB. According to Dr. Kristin L. Carman, who is the co-director of health policy and research at the American Institutes of Research, the study demonstrated the need for consumer education to fill the gaps between EMB and consumer knowledge. The study also gave cause for optimism, however. A minority of participants understood and accepted the basic tenets of EBM and expressed a willingness to increase their level of participation with their own care.

The participants in the survey also revealed an interesting aspect: just 47% of those surveyed agreed that people should pay less out-of-pocket for the most effective medical treatments. A significant minority, 33%, also believed that the better a medical treatment is, the more it should cost. Importantly, an astounding 55% of respondents stated that they did not actively participate in their own medical care. For example, these 55% said that they never took notes during medical appointments, and 28% said that they did not come prepared with a list of questions to ask their doctor.