As of May 12, 2006, New Jersey PL 2005, C. 375 ("Chapter 375") gives certain adults under the age of 30 the option to continue coverage as a dependent on their parent's group health coverage. Because this law appears, on its face, to change the definition of "dependent" for group health plans in New Jersey, there has been considerable discussion about the impact this will have on employer sponsored health plans providing coverage here. What follows is a few of the more common issues raised by employers and the "facts" that may or may not be accurate about this coverage.
1. "Chapter 375 changes COBRA in New Jersey."
This is absolutely false. No state law can alter federal continuation rights mandated under COBRA. Instead, the law creates a special extension of coverage available to certain eligible individuals to the extent those individuals were covered or could be covered under an insurance policy issued in the state of New Jersey. It does not apply to self-insured health plans. It does not apply to insurance policies written outside the state of New Jersey. It does not apply to vision, dental or disability plans. But if the employer purchases insurance coverage for health benefits and the policy is written in New Jersey, the extension applies.
2. "All adult children under age 30 can get the extension."
This is also false. In order to be eligible, the individual must be (1) unmarried and have no dependents of their own, (2) a resident of New Jersey or a full time student, (3) not covered under another group health plan or receiving Social Security Benefits, and (4) "aged-out" (exceeds the maximum age limit for dependent children) under the terms of a parent's health benefits plan. The individual is not required to provide proof of insurability nor do they have to prove that they have exhausted COBRA coverage. The individual does not have to be financially dependent on the parent.
3. "The coverage offered is the same as the parent's coverage."
This is true. Because the coverage for the dependent is based on the status of the individual as a "dependent" of the employee under the state's new definition, the individual getting a coverage extension is provided coverage identical to the coverage provided to the parent as the participant. This does not mean that the employer as plan sponsor is providing the coverage itself under the plan or that the previously aged-out individual is returned to status as a beneficiary under the terms of the plan. It simply means that the measure of coverage, the benefit levels and the coverage options mirror that coverage available to other dependents. If the parent loses coverage, or the employer ceases to offer dependent coverage, the age-30 coverage ceases as well.
4. "Employers have no obligations under Chapter 375."
Unfortunately this is false. Employers must notify parents of the right to this extension before the date a dependent "ages out" of a plan. An employer must also notify a parent when a dependent loses coverage under the extension. An employer is not obligated to contribute toward the portion of the dependent's health care premiums under this extension.
5. "Age-30 coverage is cheaper than COBRA."
This is probably true. The insurer can charge the covered dependent a premium of 102% of the actual premium, with the 2% representing an administrative service charge. However, it is anticipated that the premium itself will be 20 to 40% less than the cost of employee coverage under the employer sponsored coverage. So it may actually be less expensive for a dependent to elect the New Jersey extension rather than COBRA. If the insurer requires the employer to collect the dependent premiums (which is permissible but not required), the employer gets to keep the 2% administrative charge and remits the premium to the insurer.
6. "Coverage lasts until the individual turns 30."
Not necessarily. If the dependent gets married, has children or obtains other coverage before turning 30, the extension ends. It also ends if the employer terminates the parent's health plan, the parent ceases coverage, or the employer's plan stops covering any dependents. Of course, coverage also ceases if the dependent does not pay the required premiums. Dependents who lose age-30 extension coverage will not be eligible for COBRA coverage if their COBRA election period has already expired because of the loss of the extension coverage. The loss of this coverage will not be a "qualifying event" so as to trigger a right to elect COBRA. Also, it appears that COBRA eligibility will run concurrently with the age-30 extension coverage, making the age-30 option more attractive as less expensive coverage.
7. "Parents can pay dependent premiums through their cafeteria plans."
This is probably false. IRS Code Section 125 (as well as other federal tax code sections) envisions a certain class of dependents under federal law. This definition generally requires actual financial dependence on the parent. Since the New Jersey law is limited to state application, it is likely that the federal law would view payment of the premiums through a cafeteria plan (with pre-tax dollars) to be a violation of Section 125. However, there is no specific guidance on this issue from the state or the IRS.
8. "People who previously lost coverage can get it back through this extension."
This is true. People who lost coverage because of an aging-out of the parent's plan prior to May 12, 2006, may enroll for an extension by May 11, 2007. Individuals who age-out after May 12, 2006, are subject to a special "phase-in" period that provides that they must wait until the plan's next open enrollment period upon the next renewal. After May 12, 2007, all dependents will be able to elect the extension (1) 30 days prior to aging-out of the plan or (2) 30 days after obtaining eligibility for reasons other than aging-out (such as a return to full-time student status). Dependents eligible but not otherwise enrolled in the extension may always elect coverage during an open enrollment period.
9. "So how does the new Chapter 375 compare with COBRA?"
Under COBRA, an adult child who ages-out of coverage under a group health plan may elect to continue coverage with the group for up to an additional 36 months. Chapter 375 allows an adult child who ages-out under a group health plan to elect to continue coverage until his or her 30th birthday, so long as he or she meets all other Chapter 375 eligibility standards. An adult child must make the COBRA election when he or she first ages-out. Chapter 375 allows the adult child to make a Chapter 375 election when: (1) he or she first ages-out, (2) when he or she meets the other Chapter 375 eligibility standards, or (3) during an established open enrollment period. An adult child who exhausts the COBRA election (for instance, the 36-month period ends) may make a Chapter 375 election later if he or she meets all of the Chapter 375 eligibility standards.
The premium rate for an adult child making a COBRA election may be up to 102% of the group's single person rate. The premium rate for an adult child making a Chapter 375 election may be 102% of the rate applicable to the group's child dependents. Generally, the Chapter 375 charge may be a little lower than the charge for the same coverage under a COBRA election. The adult child's continuing coverage following a Chapter 375 election is contingent upon whether: (1) the parent continues to have coverage with the group, (2) the parent elects to continue dependent coverage, and (3) the group continues to offer dependent coverage. An adult child's continuing coverage with a group following a COBRA election is not contingent upon his or her parent's actions, or a decision by the group policyholder to eliminate the option to cover dependents, but is terminated if the employer terminates the entire plan. Also a person continuing coverage under Chapter 375 loses the right to such coverage if he marries, becomes a parent, moves out of state and is not a full-time student, or completes studies and does not live in New Jersey. None of these events disqualifies a person from continuing coverage under COBRA. Finally, the adult child's COBRA election is restricted to the group from whose coverage the adult child aged-out. The adult child's Chapter 375 election right is not restricted to the group from which the adult child aged-out.
10. "How should we send the notices?"
Employers are responsible for providing notice of the option to elect the age-30 extension to the parents before a child ages-out. COBRA also requires that participants receive notice of certain impending events, including loss of COBRA coverage, eligibility for COBRA coverage and election options. Nothing in the federal COBRA law prohibits an employer from including other information in COBRA notices. Remember that COBRA provides employers with a minimum standard that must be met, so as long as the correct COBRA information is included, other state continuation information may be included as well. Some insurers are providing separate notices to employers to distribute to all employees. Others are simply providing information to the employers to distribute at the employer's discretion. Our recommendation is that information about Chapter 375 be integrated into initial COBRA notices distributed at the time of enrollment, and that the age-30 extension information also be sent to all employees as a separate notice annually. Distribution may be completed in any reasonable manner, so mailing to all employees seems to be most effective. Employers should definitely contact their insurance carriers to verify participation information before distributing any notices.
These questions illustrate some of the high points of this new legislation, but they are by no means the only questions that will arise. Since Chapter 375 is still new law, there will undoubtedly be many more concerns as its impact becomes more widespread. For more information about the Age-30 extension and how it impacts your health benefits package, please feel free to contact our office.
Keith R. McMurdy is the Chair of the Employee Benefits & Executive Compensation Group at Grotta, Glassman & Hoffman, p.c. His practice focuses primarily on labor and employment issues arising from the design, drafting and administration of employee benefits plans. He can be reached at (973) 994-7808.