Adding ‘dependent’ to coverage not as simple as it sounds

In the next few weeks, New Hampshire employers and insurance companies will get their first glimpse of the impact of a new law that allows most unmarried young adults under 26 years old to sign on to their parent’s workplace insurance coverage.

The law – which lawmakers passed last session and went into effect in September – is aimed at “dependent” adults, but the definition is far broader than the definition contained in the federal tax code, or in most people’s minds for that matter.

Under the New Hampshire law, “dependents” could be completely independent, living outside the home, with a good-paying job. They could even have access to insurance at their workplace, but the law gives them the option to drop that coverage and go on a parent’s family plan at no cost to him or herself and at no extra cost – at least at first blush – to the employee who already has family coverage.

Their parents might have to pay taxes on this benefit, but more about that later.

The idea of the law is to cover people in the age group that is least likely to be insured and because they are at the age when they don’t always have access to insurance or because, as invulnerable 20-somethings, they don’t think they need it.

The previous law allowed parents to include on their family plan children who are 19 and full-time students, even if they are out of state. Then a bill originally designed to protect part-time students (including those out of state) was broadened with the purpose of including those in entry-level jobs that often don’t offer any coverage. But the actual law includes all young adults, student or not, no matter what the income — though the non-students have to be residents, unmarried and not covered by their own insurance.

(The law won’t affect self-insurance plans, including the plan offered by the state. The New Hampshire Municipal Association’s insurance plan – which is used by most towns and cities – will echo the state law.)

For nearly all businesses in the state that aren’t self-insured, the two-month window to add “dependents” to existing family plans ends Nov. 30. In addition, most businesses also have their regular annual window in December, allowing employees to switch to family coverage, and then add their young adult dependents to it.

Unknown numbers

Nobody really knows how many will eventually sign up for the new coverage, or even how many are eligible to do so.

To get a rough starting point, the Census Bureau estimates that there are 120,000 people in New Hampshire between 18 and 24, or about 6.3 percent of the population. That number doesn’t include students outside the state.

While full-time students are already eligible for coverage, part-time students outside the state (even if only taking one higher education course) can now be added.

On the other hand, that 120,000 figure includes full-time students who live in the state and are already on family plans. So straight off the bat, it’s unclear if that starting number is too large or too small.

It is known that, nationally, some 29 percent of people in the 18-to-24 age group don’t have health insurance. If applied to New Hampshire, that drops the eligible number down to about 35,000 — or does it? It remains to be seen whether some “dependents” would drop the individual coverage they get at work to join their family’s plan.

Nationally, fewer than a fifth of the 18-to-24-year-olds are married, which would mean some 28,000 are eligible to be added, but it is not clear how many of those even have parents who are covered by workplaces that are not self-insured.

Even if it can be determined how many people are eligible for the coverage, it doesn’t mean we know how many will.

“Any individual not married will want to take advantage,” said Tom Harte, president of Landmark Benefits, an employee benefits broker based in Hampstead.

But every unmarried individual may not know about the opportunity because employers must notify employees, not their dependents, about the new law. And not everyone is going to want to add their adult child for coverage.

That’s because, if they don’t have family coverage, they would have to switch to a family plan, which – in most workplaces – is paid for mostly by the employee. These plans aren’t cheap, and they certainly aren’t going to get cheaper, especially if more young adults join them.

“There will be an additional cost for covering more folks,” said Beth Roberts, vice president-northern New England for Harvard Pilgrim Health care. “It’s good that a lot of people are going to have the insurance. The reality is, they will use the service.”

Tax consequences

While it might be cheaper to switch to a family plan than to cover each child outside the workplace individually, it depends on who is paying for that child’s individual coverage.

If it’s mostly the child’s boss, employees might want to leave well enough alone. And even if their children are already paying for insurance, they might want to leave everything alone, because now the money would be coming out of the employee’s pocket.

In addition, those who do have family coverage already, and can therefore add their 24-year-old dependent without paying any additional premiums, still might have to deal with the tax consequences.

While some consultants say there aren’t any tax consequences, large insurers — like the Municipal Association and Anthem Blue Cross Blue Shield — contend that there are, because the state definition of dependent is so much broader than that of the Internal Revenue Service.

According to the IRS, in order for a child to be a dependent for the purposes of health-care coverage, an employee has to be providing more than half of the dependent’s support during the calendar year. If that’s not the case, then any insurance would be taxed at its “fair market value,” which – according to the Municipal Association — is the same amount it would cost to cover an individual under COBRA.

That would amount to an average taxable benefit of $7,200 to the employee, meaning that this free benefit for an independent adult child might cost a parent about $1,300 in taxes.

When employees covered by the Municipal Association found out about this little wrinkle, many wanted to revoke their decision to put their child on the family plan, said Richard Dwyer, the association’s operation manager.

“Employers are screaming about it (the new law),” said Dwyer.

Of course, the son or daughter could always slip his or parent that money to pay those taxes. After all, it would be about $5,000 cheaper than to buy his or her own coverage, but that is another factor to consider.

So no one really knows the impact of the law, and the amount it would cost is “pure speculation,” said Rep. Edward Moran, R-Bedford, one of the backers of the legislation. How many will join family plans? How many will drop individual plans? How many who sign up will use it? If there is a cost, will it spread over premiums across the broad, or zero-in on family coverage, resulting in less families being covered in the long run?

The new law does require that the state Insurance Department issue a report on its effect, but it isn’t due until Dec. 15, 2008.

Until then, said Moran, any talk about added cost “is pure speculation. We may not end up having many people decide not to do this, but I don’t believe it.”

And will any increase in claims be offset by young adults using preventive care more and emergency rooms less? That is, after all, a major rationale for getting everybody covered in the first place.

“This is at least a more intellectually honest way of accounting for the cost,” said Moran.