Section 2714 of the Patient Protection and Affordable Care Act, signed into law on March 23, 2010, and modified one week later by a reconciliation measure, mandates expanded coverage for dependent children under a parent's employer-provided health care plan.
The requirement under the reform act is for employer plans to provide coverage to employees' dependent children until they reach age 26 (the value of this coverage is non-taxable). A related provision in the reconciliation measure excludes from taxable income dependent coverage up to the end of the year before the dependent reaches age 27—so if a dependent turns 26 in June, the plan can provide non-taxable coverage to the end of that year.
The reconciliation measure also makes section 2714 applicable regardless of a dependent's marital status. The mandate excludes dependent children who are eligible to enroll directly in another employer's health plan.
Prior to reform, plans could choose to allow dependents aged 19 through 24 to receive tax-exempt health coverage under their parent’s policy as long as they remained full-time students who were not financially independent.
Unanswered questions remain about dependent eligibility under the reform law, however, and the answers will depend on forthcoming guidance from the U.S. Department of Health and Human Services. These questions include the definition of who is covered under the term “child” (other than natural or legally adopted children) as used in the new law. The ambiguity concerns foster children, step children and others.
Impact on Dependent Eligibility Audits
HRAdvance, a provider of dependent eligibility audit services, reports that in recent years its clients have found, on average, that 11 percent of dependents receiving coverage have been ineligible. These included dependents who were aged 19 through 24 who were not enrolled as full-time students and not receiving their principal support from the covered employee.
"Children age 19 and older make up approximately one-third of the total ineligible dependents in our current eligibility audits,” said HRAdvance President Craig Firestone.
Historically, eligibility audits have required employees with covered dependents to provide proof of relationship, financial responsibility and student status to prove eligibility. Under the post-reform system, employees will no longer have to prove financial responsibility or student status for child dependents. "We estimate the number of ineligible overage dependents will be reduced from 3.3 percent of the total population to an average of 1.5 percent, based on student status now being irrelevant," said Firestone. "We further estimate that eliminating financial relationship as a condition for eligibility will reduce the results by another 2 to 3 percent."
Overall, Firestone expects that the number of ineligible dependents will drop by about 4 to 5 percent compared to pre-reform levels. However, he believes that the impact on employers' costs will be limited because those under age 26 tend to incur fewer and less costly claims than others. Nevertheless, it will remain cost effective, Firestone contends, for employers to continue to find and exclude dependents age 26 or older, as well as otherwise ineligible non-spouse/partner adults receiving coverage through a family plan.
"The return on investment from a dependent eligibility audit will be reduced, but to a lesser degree than the lower ineligible percentages, as a direct result of the reform law," he concluded.
Confronting 'Status Quo Bias'
"One thing that can be predicted with great accuracy is that adult dependents will tend to remain on the plan in which they first enroll. Hundreds of scientific studies have established that even if more attractive options are available to a person, they will tend to stick with their first decision," notes a white paper from benefits auditing firm Chapman Kelly Inc.
"Employers need to understand the power of the Status Quo Bias as they formulate strategies for containing the cost of the expanded dependent coverage requirements," the firm advises.
Stephen Miller is an online editor/manager for SHRM.
Health Care Savings with Dependent Eligibility Audits, SHRM Online Benefits Discipline, April 2009
Health Plan Eligibility Audits: Verifying Who Is Covered, SHRM Online Benefits Discipline, March 2009
Dependent Audits: A Way to Lower Health Plan Costs, HR Magazine, February 2009
Health Care: Tips for Auditing Dependent Eligibility, SHRM Online Benefits Discipline, February 2008
Related White Paper—External:
Dependent Eligibility Under Health Care Reform: Cost-Containment Strategies Employers Should Take from the Signing of the Bill to Beyond 2014, Chapman Kelly Inc., April 2010
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page