Health Insurance for Your Dependent Until Age 26? That Depends

Young adults just graduating from college may have thought they had just one less thing to worry about as they begin new lives -- health insurance. Health-care overhaul legislation, signed into law by President Obama earlier this year, allows adult children to remain on their parents' health plan until age 26. But some of these older dependents are finding that the coverage won't be available as soon as they had thought.

Though the provision that allows parents to keep or add adult-child dependents takes effect in September, some insurers have already begun providing coverage to prevent lapses in coverage. Not all employers, however, are going along in offering the benefit, and there's no requirement that they do so.

Wiggle Room for Employers

The law makes the dependent-coverage extension effective for new health plans that begin on or after Sept. 23. But employers have wiggle room because many group plans have start dates that coincide with the beginning of the year. Rather than modify existing plans now, some companies are choosing to not begin offering extended dependent coverage until Jan. 1, even if their insurer is willing to offer the benefit now. In such a scenario, dependents who lost coverage upon graduating college this spring may find that won't be re-eligible for coverage under the parent's plan until next year.

That's creating a dilemma for many young adults and their parents. Existing state laws, however, may help. Some 25 states require plans to provide coverage for dependent children beyond their teens, says the Kaiser Family Foundation, a health advocacy organization. Though most extend coverage to age 25, others stipulate age 24 or 26, while New Jersey stretches the dependent age to 30. But such coverage may be restrictive, mandating that eligible young adults be unmarried, students, or living in the same state as their parent with private coverage.

The federal law, when it takes effect, is less cumbersome. Dependent children don't have to be students or live with their parents, and they can even be married and still be covered by their parent's plan.

Calls by Anxious Parents

Needless to say, the new federal provision has created a lot of confusion. Hewitt Associates (HEW), which helps employers manage employee-benefit programs, saw a rush of calls by anxious parents seeking to add their dependent children when the health-care reform legislation became law March 23, even though no insurer had yet begun offering the benefit.

Amid the recent push by some insurers to begin offering dependent coverage this month, Hewitt is once again fielding calls from employees wondering when their company will start providing the benefit. "It really is: 'Wait and see'; 'You're going to hear more'; or 'Yes, we're doing it right now,' " says Karen Taylor, health and welfare strategy leader at Hewitt.

Hewitt says its research shows that about 1 million of the employees covered by its book of business are already receiving the benefit, and the company expects that 20% to 25% of employers will adopt the provision ahead of the January deadline.

Individual Insurance Can Be Cheaper

If the benefit isn't yet offered by a parent's employer, Taylor says a student who just lost insurance because he or she graduated, or is no longer eligible because of age, can continue to get coverage under the federal COBRA statute. But, she says, that's expensive. Given their youth, young adults who have lost coverage would probably be better off purchasing insurance on the open market. In general, young people tend not to have significant health problems, she says, "so their insurance coverage can be much lower in the individual market than COBRA."

Another survey by Mercer shows just 6% of the 800 employers the employee-benefits firm polled currently extend coverage to dependent children up to age 26, and only a quarter said they are likely to begin offering the benefit before the Jan. 1 renewal deadline.

Large, self-insured employers are even less likely to act before they have to: Among respondents with 5,000 or more employees, just 16% said they are likely to implement the rule early, Mercer says. Most of the insurance companies that are extending dependent eligibility immediately are giving their group plan customers 30 days to opt out -- and the survey results suggest that most employers will choose to wait.

Big Deal for Employers

Cost is one reason companies aren't implementing the benefit sooner than they have to. "This change is a pretty big deal for employers, with new notification requirements, employee communication and tax implications," says Mercer consultant Tracy Watts. "Not to mention that it would be an immediate, unbudgeted business expense."

Taylor says Hewitt's estimates show that adding adult children will increase employers' health-care costs about 1% to 2%. That may not be an enormous amount of money, but it's relative. "An employer with 40,000 employees is impacted differently than an employer with 300,000, so 1% or 2% can be large depending on who you are," she says.

Furthermore, even an incremental increase in potential costs comes at time when employers are still closely watching their expenses following a drawn-out recession and a decade of year-to-year double-digit increases in health-care costs, Taylor says. "Employers are just trying to make sure that they're offering competitive benefits, and they're doing the right thing."