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April 28, 2010
Tax-Free Benefit Plan Applies to Dependent Health Coverage
Employers that offer cafeteria plans can allow employees to begin making pre-tax contributions immediately for health coverage for dependents who are under 27, even if the changes to the plan have not yet been made on paper, the IRS said.

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The Patient Protection and Affordable Care Act, more commonly known as healthcare reform, requires group health plans that provide dependent coverage of children to continue to make such coverage available for an adult child until age 26. The law also amends the Internal Revenue Code (Code) to give certain favorable tax treatment to coverage for adult children. The IRS recently published guidance addressing questions about tax treatment of such coverage.

The IRS said the new law allows employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit. Cafeteria plans allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits.Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer's plan or are added to the employer's plan at any time.

The notice said that employers with cafeteria plans may permit employees to immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate the change.

"We want to make it as easy as possible for employers to quickly implement this change and extend health coverage on a tax-favored basis to older children of their employees," said IRS Commissioner Doug Shulman.

Read IRS Notice 2010-38.

Additional information about the healthcare reform is available in BLR's Healthcare Reform Resource Center.

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