As previously reported, the IRS recently released final regulations on the Affordable Care Act’s (ACA) employer “shared responsibility” provisions, also known as the “pay-or-play” mandate. Under the mandate, in order to avoid potential penalties, an applicable large employer (generally, 50 or more full-time equivalent employees (100 or more in 2015)) must offer affordable, minimum value health coverage to its full-time employees and their “dependents.”

For purposes of the pay-or-play mandate, “dependents” are an employee’s natural or adopted children under age 26 (not spouses). The final regulations clarify that an employer may exclude employees’ stepchildren, foster children, and children who are non-U.S. citizens or nationals (with certain exceptions) from coverage under its group health plan without exposing itself to a potential penalty.

The final regulations also provide welcome news for employers who do not yet offer coverage their full-time employees’ dependents. An employer that is planning to offer dependent coverage has until the start of its 2016 plan year to do so, as long as it takes steps during its 2015 plan year.

Transitional Relief Extended for 2015 Plan Year

To provide employers sufficient time to expand their group health plans to include dependents, the final regulations provide that any employer that takes steps during its 2015 plan year toward satisfying the requirement will not be subject to a pay-or-play penalty solely due to failing to offer coverage to dependents for the 2015 plan year.

The extended transition relief applies to plans under which:

  1. dependent coverage is not offered,
  2. dependent coverage that does not constitute minimum essential coverage is offered, or
  3. dependent coverage is offered for some (e.g., biological children), but not all, dependents (e.g., adopted children).

This transitional relief is not available to an employer that eliminates dependent coverage after having offered it during its 2013 or 2014 plan years.

How may an employer avail itself of this transitional relief? The guidance doesn’t say. It is reasonable to assume that it means actions taken in the normal course to secure coverage, such as, cost/budget analysis of adding the additional coverage, solicitation of premium quotes from insurance companies (for a fully-insured plan), and negotiating additional third party administrator fees (for a self-insured plan). Employers wishing to rely on the extended transitional relief should consider documenting any steps taken in 2015 to secure dependent coverage beginning in the 2016 plan year. This may come in handy to support an employer’s reliance on the transitional relief in the event a penalty is assessed for failure to provide such coverage during the transitional period.

New Exclusions for Stepchildren, Foster Children and Children who are non-U.S. Citizens of Nationals (subject to certain exceptions)

For purposes of the pay-or-play mandate, the proposed regulations had defined the term “dependents” to include biological children, stepchildren, adopted children and foster children.

The final regulations define a “dependent” as a child of the employee who has not attained age 26 (with the child being considered a dependent for the entire calendar month in which he or she attains age 26). Solely for purposes of any potential penalties under the pay-or-play mandate, the final regulations exclude from the definition of dependent:

  • foster children;
  • stepchildren; and
  • children who are not U.S. citizens or nationals, unless the children are residents of a country contiguous to the U.S. (Canada or Mexico) or are within a special tax exception that applies to adopted children.

This means that employers sponsoring group health plans with exclusions for any of these categories of dependent may retain these exclusions without fear of triggering pay-or-play penalties. Of course, employers may cover any of these dependents under their group health plans if they wish. However, if they do offer that coverage, the ACA requires that this coverage extend until age 26 and without regard to the child’s marital status, student status or other dependency factor, including the availability of other employer coverage.

Does this mean that foster children and stepchildren will be left without health coverage? Not necessarily. The final regulations note that that requiring employer-provided health insurance coverage for foster children would result in duplicative coverage because government agencies typically provide this coverage. Similarly, the final regulations note the possibility of duplicative coverage with respect to stepchildren, where the employers of the child’s biological parents may have an obligation under the ACA to provide group health coverage.

The final regulations also confirm that employers are not required to offer spousal coverage for purposes of avoiding a pay-or-play penalty.

In evaluating the final regulations, employers may be relieved to learn that they have the flexibility to exclude from their health plans stepchildren, foster children, and most children who are not U.S. citizens or nationals, and have more time to cover qualifying dependents in order to avoid penalties.