Critical End of Year Issues Arising from Federal Health Care Reform

Benefits Brief
October 20, 2010

We want to highlight two of the many new federal health care reform requirements that require immediate attention and may require amendments to your existing welfare plan documents.

Expansion of dependent care coverage. Effective for plan years beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans), group health plans must cover certain children of participants until the age of 26. Effective as of March 30, 2010, group health plans are permitted to provide this coverage on a tax-favored basis through the end of the calendar year in which the covered child attains age 26. That is, the employer-portion of the cost of adult child coverage is not includable in the employee’s income and the employee’s-portion of the cost of any of that coverage can be paid on a pre-tax basis, even if the child is no longer a dependent for federal income tax purposes. In addition to a new notice requirement and special enrollment right related to this law change, this provision will require coordination with payroll and will affect 2010 Forms W-2 if adopted for 2010. Plan amendments will likely also be required (generally no later than December 31, 2010 with respect to amendments of cafeteria plans).

Over-the-counter medicine or drug coverage. Effective January 1, 2011, health reimbursement arrangements and health care flexible spending accounts will not be permitted to reimburse the cost of over-the-counter medications or drugs. There is no change in coverage for insulin, medications purchased with a prescription, or over-the-counter items other than medications, such as crutches. Medications available with or without a prescription can continue to be reimbursed provided that the individual actually has a prescription. The January 1, 2011 effective date is strict, with a very short relief period for debit and credit card systems. There is no relief for noncalendar year plans or for expenses incurred during any grace period after December 31, 2010.  This change should be clearly communicated to participants so that they may plan accordingly, and plan documents will need to be amended by June 30, 2011.

Form W-2 reporting of group health coverage cost. The Internal Revenue Service has just announced that the new requirement to report the aggregate cost of employer-sponsored coverage on Form W-2 will be optional for 2011 Forms W-2 (due in early 2012).

Other changes coming. Federal health care reform imposes numerous other requirements, including a myriad of notice and special enrollment rights, that become effective for plan years beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans). So-called grandfathered plans may not be subject to all of these requirements, may be subject to different requirements or may be subject to the requirements as of a deferred effective date. We generally anticipate that your health insurance provider or your third party administrator will be working with you on these issues but many will also require plan document changes. Please contact us if you would like us to review your documents and notices or if you have any other questions with respect to the effects of federal health care reform.