Year End Deadline for Employer-Sponsored Cafeteria Plan Amendments

Employers have until Dec. 31, 2010 to amend cafeteria plans to incorporate new provisions related to adult children and over-the-counter drugs.

Expanded Health Plan Coverage for Adult Children
Under the Affordable Care Act, health plans that provide coverage for employees’ children are required to continue coverage until age 26, regardless of the child’s tax dependent status, employment, residency, student status, marital status or eligibility for other health coverage.

This provision applies to insured and self-insured health plans and is effective for plan years beginning on or after Sept. 23, 2010. However, plans in existence on March 23, 2010 can restrict coverage until 2014 if the adult child has access to health coverage through an employer’s plan (other than a parent’s plan).

In addition, the IRS has issued Notice 2010-38, which provides that employers may permit pretax salary reductions for adult children effective after March 30, 2010, even if the cafeteria plan is not yet amended for this provision. Employers have until Dec. 31, 2010 to amend the cafeteria plan language to incorporate this change.

You will want to note, under the Notice, health plan premiums and medical expenses for an adult child under a health plan and health flexible spending account (FSA) are exempt from federal income, FICA and FUTA taxes. For this purpose, an adult child is: a child, stepchild, adopted child, or eligible foster child who is under age 27 during the entire calendar year, even if the child does not qualify as the employee’s tax dependent. The IRS is expected to issue additional guidance in the near future.

Over-the-Counter Drugs
Also under the new law, reimbursements cannot be made for over-the-counter medicine or drug expenses incurred after Dec. 31, 2010 without a prescription (except for insulin). This includes medicine or drug expenses incurred in 2011 for plan years starting in 2010 or which have grace periods for run out claims in 2011. Therefore, health FSAs which currently allow reimbursement of over-the-counter medicines or drugs will need to be amended by Dec. 31, 2010 to comply with the new rules.

Your Next Steps
As an employer, you will need to amend your cafeteria plan document and summary plan description prior to Dec. 31, 2010. Also, be aware of the federal and state tax reporting rules since tax laws vary from state to state. Please contact us if you need assistance or would like more information.