Dependent Benefits - Where Do They End?

Health Care Reform has shone a light on many aspects of the health care continuum.  One such area now having such a spot light, is the possibility of covering dependents past current health plan policy maximum ages. Current reform provisions appear to extend coverage to dependents up to age 26 and do not seem to require the minimum limitation provisions that previously were in place – that of student status requirements, much less adherence to IRS dependency provisions.

Employers are reeling at the possibility of large numbers of previous dependents, possibly being allowed/required to be welcomed back into the plan. What will these numbers do to plan experience? How will they be underwritten? What will happen with reinsurance? How will the costs be born? Can the health plan benefits continue to be offered at the same levels?

 In my estimation this is another example of the failure of Congress to know the process in place and how the laws of the land are inter-utilized. In a magnanimous gesture to extend coverage to young non-working adults, on the backs of their working parents, they have failed to see the impact on the parent’s employers or the trickle down affect on all working adults paying premiums today. To understand the point, you must understand how it works today.

Today most all employers who offer health insurance coverage to their employees and their family members also provide the ability for covered dependents to have that coverage extended past age eighteen if the dependent is enrolled in some level of additional continuing education program. Eligibility criteria for that extended coverage varies widely from highly detailed to no limit except age.  Standard eligibility limitations in such policies include: age-range covered (usually 19-13 or 19-24), type of institution eligible to be attended, minimum credits to be maintained, attendance length of time during the year (2 semesters or 3 quarters), identification of who defines what a “full time student” is (usually the institution registrar) and finally a proof statement from the institution certifying attendance (usually a grade report(s) and/or a registrar’s letter). As students age out of the plan or finish their school and become no longer eligible, all are now offered the benefit of COBRA as a bridge until they find their own adult coverage.

Traditionally the lynch pin to declaring full time student status in the first place is the underlying definition used by the Internal Revenue Service of what is considered a dependent. The US Internal Revenue Service defines a dependent as:    

The IRS definition of a dependent requires that all five of the following dependency tests be met:

1. Member of Household or Relationship Test. At least one of the following must be true:

1. The dependent lived with the taxpayer for the entire year as a member of the taxpayer's household, except for temporary absences. Temporary absences include attending school, taking vacations, business trips, military service, and hospital stays. (If the person is placed in a nursing home for an indefinite period of time to receive constant medical care, the absence is considered temporary.) The relationship between the taxpayer and the dependent must not violate local laws (e.g., zoning restrictions on the number of unrelated persons living together).
2. The dependent is related to the taxpayer in one of the following ways: child, parent, brother/sister, stepparent, stepchild, stepbrother/stepsister, half brother/half sister, grandparent, grandchild, son-in-law/daughter-in-law, mother-in-law/father-in-law, brother-in-law/sister-in-law. Also, if related by blood, relatives can include uncle/aunt and niece/nephew. Cousins do NOT meet the relationship test. Relationships established by marriage are not ended by death or divorce. Relatives do not have to be members of the taxpayer's household for the entire year. (There are special rules for children born during the year, adopted children, and foster children.)

2. Citizen or Resident Test. The dependent must be, for some part of the year, a US citizen or resident, or a resident of Canada or Mexico. Foreign students who stay with you as part of an international education exchange program generally do not qualify as dependents.
3. Joint Return Test. The dependent must be unmarried, married but not filing a joint return, or married filing a joint return only to claim a refund of withheld tax (neither the dependent nor spouse may claim personal exemptions on the joint return).
4. Gross Income Test. The gross taxable income of the dependent (all taxable income including money, property and services, unemployment compensation and certain scholarships, but not welfare benefits and not nontaxable Social Security benefits) may not exceed the exemption amount. In 2004 the exemption amount was $3,100. This test does not apply if the dependent is a child of the taxpayer and either under age 19 at the end of the year, or a full-time student under age 24 at the end of the year.
5. Support Test. The taxpayer must have provided more than half of the dependent's total support for the entire year. (Starting in 2005, the 50% support test only applies to qualifying relatives. For qualifying children, it is sufficient that the child not have provided more than half his/her own support.) Support includes food, clothing, shelter, education, medical and dental care, recreation, and transportation; as well as welfare, food stamps, and housing provided by the state. You must compare the dollar value of the support provided by the taxpayer with the total support the dependent received from all sources. (Note: There are special rules for dependents who receive support from multiple sources and for children of divorced or separated parents.) The support tests consider, not just taxable income.

Under Health Care Reform, it appears as though the Congress either failed to know that the IRS definition of dependent was used in health plan policies or was ignorant of its provisions, or worse yet, blithely ignored the disconnect. For the sake of not making this blog as long as “War and Peace”, I will not even take up the possibility that Congress is going to also change the Tax Code on dependent status. Can you say ”INCREASED DEFICIT”?

Whichever the case, our industry, and that of the entire health care industry, is now teetering on another abyss. A whole class of additional enrollees is out there. Some argue that due to age and usual health status the risk is minor. But is that true. We have all seen the commercials regarding the decreasing health status of our population. The seeming inference by Congress is that employers should just open up their health plans to this group and include them. For free? I think not. If we are forced to take them back in, then new underwriting and reinsurance rules will have to be added and new “Family” categories will have to be created that include these people. People who do not have these dependents should not have to pay for their coverage. The Congress, in all their complete and utter disconnects from the people, have again waved their magic wand and have created another mess for us to clean up and deal with. And they wonder why health care is so expensive!