As a result of changes made by the Affordable Care Act (the “Act”), if a parent’s employer-sponsored health plan covers children, medical expenses incurred by a child under age 27 can be paid or reimbursed as a tax-free fringe benefit even if the child is not the parent’s dependent for tax purposes. The expanded benefit, effective March 30, 2010, applies to both workplace and retiree health plans, as well as to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return. A child includes a son, daughter, stepchild, adopted child, or eligible foster child.
The requirement to make adult child coverage available applies only until the date that child turns 26. However, if coverage extends beyond the 26th birthday, the value of the coverage can continue to be excluded from the employee’s income for the full tax year in which the child turned 26. For example, if a child turns 26 in March, but is covered under his parent’s employer plan through December 31, the value of the health care coverage through December 31 is excluded from the employee’s income for tax purposes.
This new age 26 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.