We receive several inquiries from our clients asking if their FSA Plan Documents need amended due to The Health Care and Education Reconciliation Act’s (HCERA) extension of tax-free health coverage for adult children. The answer depends on how “Dependent” is defined in your plan document.
Expenses for adult children up to age 27 can now have favorable tax treatment because HCERA changed the definition of dependent in IRC 105(b). If your plan document already refers back to 105(b) as the definition of “Dependent”, changes to your Plan Document are not necessary. Plan Documents that define dependent more specifically, like stating age, student status, etc., rather than just following 105(b), may need an amendment.
For example, FSA Plan Documents written by BASIC NEO do not require amending, since they clearly define a “Dependent” as follows:
“Dependent” means any individual who qualifies as a dependent under Code Section 152 (as modified by Code Section 105(b)). The definition of Dependent is hereby incorporated by reference to the extent necessary to interpret and apply the provisions of this Health Care Reimbursement Plan.
If you want to read the analysis and Code reference, it follows:
The Health Care and Education Reconciliation Act (“HCERA”) enacted on and effective on March 30, 2010, expands the tax exclusion for employer-paid coverage of an employee’s child to the end of the calendar year in which the child has not yet attained age 27. Put another way, the exclusion applies to the end of the calendar year in which the child attains age 26. The first agency guidance on this tax exclusion was published on April 27, 2010, in IRS Notice 2010-38, http://www.irs.gov/pub/irs-drop/n-10-38.pdf.
Specifically, Notice 2010-38 provides guidance on the Affordable Care Act’s amendment of § 105(b) of the Code, effective March 30, 2010, to extend the general exclusion from gross income for reimbursements for medical care under an employer-provided accident or health plan (which includes the FSA) to any employee’s child who has not attained age 27 as of the end of the taxable year. (See below from Notice 2010-38).
EXCLUSION OF EMPLOYER-PROVIDED MEDICAL CARE REIMBURSEMENTS FOR EMPLOYEE’S CHILD UNDER AGE 27
Section 105(b) generally excludes from an employee’s gross income employer-provided reimbursements made directly or indirectly to the employee for the medical care of the employee, employee’s spouse or employee’s dependents (as defined in § 152 (determined without regard to §152(b)(1), (b)(2)or (d)(1)(B)). As amended by the Affordable Care Act, the exclusion from gross income under §105(b) is extended to employer-provided reimbursements for expenses incurred by the employee for the medical care of the employee’s child (within the meaning of § 152(f)(1)) who has not attained age 27 as of the end of the taxable year. (The Affordable Care Act does not alter the existing definitions of spouse or dependent for purposes of § 105(b).) Under § 152(f)(1), a child is an individual who is the son, daughter, stepson, or stepdaughter of the employee, and a child includes both a legally adopted individual of the employee and an individual who is lawfully placed with the employee for legal adoption by the employee. Under § 152(f)(1), a child also includes an “eligible foster child,” defined as an individual who is placed with the employee by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. As amended by the Affordable Care Act, the exclusion from gross income under § 105(b) applies with respect to an employee’s child who has not attained age 27 as of the end of the taxable year, including a child of the employee who is not the employee’s dependent within the meaning of § 152(a). Thus, the age limit, residency, support, and other tests described in § 152(c) do not apply with respect to such a child for purposes of § 105(b).
We are dedicated to provide quality, timely, and professional FSA and COBRA administration services. This communication is intended to be a reference and we recommend you carefully review your plan document to ensure compliance with the recently enacted HCERA.
Please contact us if you have questions regarding your Plan Document.