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New Law Allows Tax-Free Health Coverage to Older Children

Categories Tax Tips (Fed)

Changes made by the recently enacted Patient Protection and Affordable Care Act, provide tax-free health coverage for an employee’s children who are under age 27. The change is effective March 30, 2010. These changes immediately allow employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit.

In addition to extending coverage to older children, the Affordable Care Act also requires plans that provide dependent coverage to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided no later than plan years beginning on or after September 23, 2010. The favorable tax treatment applies to that extended coverage.

IRS Notice 2010-38 explains these changes and provides further guidance to employers, employees, health insurers and other interested taxpayers.

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