Dependent Coverage Rule Causes New Benefit-Coordination Problems
|Date Posted: February 11, 2011|
Employer and union plans are seeing an upswing in coordination-of-benefit (COB) dilemmas created by dependent coverage provisions (in effect since mid-2010) of the health reform law.
The provision, which requires plans that offer dependent coverage to admit adult children as dependents on their parents' health plans up to age 26, is creating situations that the old order-of-benefit determination (OBD) rules can't handle.
The provision took away the qualifying criteria for being a dependent that plans and insurers have relied for years: marital status, residency and being claimed on parents' taxes. Eliminating these standards has made OBD and COB more difficult to apply.
As older dependents return to their parents' coverage and may be covered by both (divorced) parents' plans, payers face situations in which divorce decrees and custody rulings are expired. More plans must use the rule under which the plan covering the parent the longer period of time is primary. In some situations, plans and insurers will have no reliable rules to determine which parent’s plan pays primary.
"When you think about a dependent who is married, living on their own, not being claimed on their parents’ taxes, and can still be claimed on their parents insurance, nothing makes sense any more," a manager at a Midwestern ASO company said.
She described two such situations. Contributing Editor Jack Helitzer, Esq., who writes for Thompson Publishing Group’s Coordination of Benefits Handbook, offers answers.
- Situation #1 -- A 20-year old dependent in college is being added to a self-funded plan under his natural father. His natural mother also covers this dependent. The divorce decree ceased to be in force when the dependent turned 18. Which plan is primary for this dependent?
Answer: Because the divorce decree is no longer in effect, you go back to the usual rule that is applicable -- which would be the birthday rule, so the plan covering the parent whose birthday falls earlier in the year pays first, and the plan of the parent whose birthday falls later in the year is secondary. And if these parents have the same birthday, the plan covering the parent the longer period of time is primary. The applicable regulations should guide the plans in figuring out when each plan first covered each parent. Also: Apply your plan’s COB regulation, which should be based on your state’s COB regulation.
What Can Make Things Difficult: The plan you're coordinating with is a self-insured ERISA plan and has a COB provision that is inconsistent with your state's COB provision.
- Situation #2 -- A 23-year old dependent (with divorced parents who both remarried) is now covered under both step-parents’ insurance policies. The dependent doesn’t live with either family. How do we determine primacy? Can we substantiate our reasoning for who is primary with this self-funded group? The policies covering both step-parents follow the state’s COB provision.
Note: The new federal law overrides policy provisions that may have required older children to either: (1) reside with his or her parents or step-parents; or (2) be in college or graduate school.
In this scenario, the mother’s husband is one step-parent and the father’s wife is the other step-parent. The birthday rule would not seem to apply because the parents are not married to each other. There is no applicable divorce decree, so the divorce decree rule would not apply.
Answer: Under these circumstances, one usually moves on to the next rule that applies, which in this case would probably be the longer or shorter period of coverage rule. Try to determine which step-parent’s plan covered this child for the longer period (the plan covering the parent the longer period of time is primary). If that doesn’t work, consider negotiating an arrangement under which claims for this dependent will be split on a 50/50 basis. In most instances, such an approach -- even if the claim is catastrophic -- will cost less in the long run than litigation.
Help Is Not on the Horizon
There is no sign of regulatory guidance on COB, as promised in the reform law, which took away plans’ “normal” criteria for being a dependent.
Note: The reform law amends the Internal Revenue Code to provide favorable tax treatment when covering adult children. In Notice 2010-38, the IRS provided guidance regarding this tax treatment.
For more information, see Coordination of Benefits Handbook.