August 27, 2007
Change in Definition of Dependent under Minnesota Insurance Law
Impact on Governmental Plans
Amendment to State Law. As we reported in a prior client alert, during its 2007 legislative session, the Minnesota legislature made a relatively minor change to Minnesota insurance law that could have a significant impact on employers who sponsor major medical, dental, and vision coverage for their employees. The legislature amended the definition of “dependent” found in Section 62L.02, subdivision 11, to provide that “dependent” includes, among others, “unmarried children under the age of 25.” Previously, a child aged 19 through 24 had to be a full-time student in order to be a dependent unless the child was disabled.
Note: The amendment to Section 62L.02 becomes effective January 1, 2008. For insured plans, it applies to a policy issued or renewed on or after that date. For self-insured plans, it applies to the plan as of the first day of the plan year beginning on or after that date. For plans with calendar year plan years, compliance is required beginning on January 1, 2008.
Direct Impact of Amendment – To Whom Coverage Must be Provided. The definition of “dependent” in Section 62L.02 is incorporated into Section 62A.302. Under that section of the statutes, every insured health plan (medical, dental, and vision) that provides dependent coverage must define “dependent” no more restrictively than the definition of “dependent” found in Section 62L.02. This requirement applies to insurance policies issued to governmental employers as well as to insurance policies issues to non-governmental employers.
This requirement also likely applies to self-insured coverages provided by governmental employers. Although Section 62A.302 does not directly apply to self-insured coverage, Section 471.617 requires self-insured plans sponsored by governmental entities to “provide all benefits which are required by law to be provided by group health insurance policies.” Although the term “benefits” is not defined by the statute, the term could be interpreted quite broadly to include to whom coverage is provided. In addition, it has been the historical practice of governmental self-insured plans to follow the rules applicable to insurance policies when defining “dependent.” Accordingly, we recommend sponsors of self-insured plans also use the new definition of “dependent” found in Section 62L.02.
Indirect Impact of Amendment – Tax Consequence of Certain Required Coverage. The amendment to the statute creates a tax issue for employers sponsoring group health coverage. A potentially significant number of children who will be required to be covered under the amended law will not be “dependents” for purposes of the provisions of the Internal Revenue Code (the “Code”) related to group health coverage. For instance, any child who is 19 or older during the calendar year, is not a full time student, and does not receive at least half of his/her support from the employee will not be a dependent for the purposes of the Code.
If an individual covered under a group health plan is not an employee’s spouse or “dependent” (as provided in the Code), coverage for that individual cannot be provided on a tax-favored basis. In other words, if the employer pays for, or provides, the coverage, the value of the coverage provided to the non-dependent individual must be imputed as income to the employee. Also, if the employee pays for the coverage on a pre-tax basis through the employer’s cafeteria plan, the value of the coverage provided to the non-dependent individual must be imputed as income to the employee.
Note: Under the proposed cafeteria plan regulations released on August 6, 2007, an employee may pay for a non-dependent’s coverage through a cafeteria plan, provided the value of the coverage is imputed as income. Under the prior cafeteria plan rules, the cost of coverage for such non-dependents could not have been paid through the cafeteria plan. This would have required the employer to allocate the deduction from the employee’s pay for health premiums between pre-tax and after-tax contributions. The proposed regulations, which employers can rely upon now, simplify this process by allowing employers to impute income at the end of the year.
As a result, employers will need to monitor the status of the children covered by their plans to ensure the coverage provided under the plan is treated appropriately for income tax purposes.
Indirect Impact of Amendment – Benefits Under Reimbursements Arrangements. Many employers have adopted health reimbursement arrangements (HRAs), or are funding HSAs, to coordinate with the major medical coverage they provide to their employees. The amendment to the statute also impacts these arrangements.
Under an HRA, for example, an employee may receive reimbursement for expenses incurred by the employee and the employee’s spouse and dependents. “Dependent” for this purpose means an individual who is a dependent under the Code. Expenses incurred by children who are not dependents under the Code generally cannot be reimbursed by an HRA. Accordingly, if a child covered under the major medical coverage is not a dependent under the Code and incurs an expense that is denied due to the deductible, that expense cannot be reimbursed through the HRA. In many arrangements, expenses not covered by the major medical plan are automatically submitted by the carrier or third party administrator (“TPA”) to the employer’s HRA. A claim denied due to the deductible constitutes an eligible expense under the HRA and, therefore, is automatically reimbursed. In these types of arrangements, the carriers and TPAs may need to modify their systems to ensure expenses for children who are not dependents under the Code are not automatically reimbursed by the HRA.
Under an HSA, the HSA owner may take a tax-free disbursement from his/her HSA for expenses incurred by the HSA owner and the owner’s spouse and dependents. “Dependent” for this purpose means an individual who is a dependent under the Code. For those employees using an HSA to reimburse expenses denied due to the deductible under the employer’s high deductible health plan, any distributions taken to reimburse expenses incurred by children who are not dependents under the Code will be taxable.
Action Items. Employers sponsoring group health coverage should take the following steps as a result of the amendment:
- Ensure the medical, dental, and vision plan documents and descriptive documents are updated effective upon the renewal date or first day of the plan year falling on or after January 1, 2008, to include the revised definition of dependent under Minnesota law.
- Institute a procedure to determine whether children enrolled in the group health plan are dependents for purposes of the Code by, for example, using a certification of dependent status form.
- Establish a process to ensure the value of coverage provided to children who are not dependents for purposes of the Code is imputed as income to the employee at the end of the year (if the cost of such coverage is paid by the employer or by the employee on a pre-tax basis through the cafeteria plan).
- If you sponsor an HRA that receives claims automatically from the carrier or TPA providing or administering the major medical coverage, contact the carrier or TPA to address whether it will be implementing procedures to ensure the HRA does not reimburse the expenses of a child who is not a dependent under the Code.
- If you sponsor a high deductible health plan compatible with an HSA, inform your employees enrolled in the high deductible plan about the consequence of taking a disbursement to reimburse expenses incurred by a covered child who is not a dependent under the Code.
Please contact us if you have questions regarding the consequences of the amendment to the Minnesota law with respect to dependent coverage or if you would like our assistance with any of the action items identified above.
In light of the impact of the amendment on the tax consequences of most employer-provided coverage, we contacted the Department of Commerce to get some additional background on the amendment. The Department indicated the amendment was designed to keep children who are under the age of 25 covered by health insurance. The Department also indicated the carriers, who endorsed the change, did not raise the tax issue. Finally, the Department indicated, in light of the concerns we identified, it will be discussing the issue over the summer and/or fall and could present the issue to the legislature next session.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.