The Internal Revenue Service has provided guidance on how tax-free health insurance coverage should now be provided for employees' children who are under 27 years of age under the recently passed health care reform law.

The IRS said that changes under the act will immediately allow employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit.

Notice 2010-38 explains these changes and provides further guidance to employers, employees, health insurers and other interested taxpayers.

The expanded health care tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.

Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, if the children are already covered under the employer's plan or are added to the employer's plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age replaces the lower age limits that applied under prior law, as well as the requirement that a child generally qualify as a dependent for tax purposes.

The notice says that employers with cafeteria plans may permit employees to immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.

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