Adding adult kids to health care, FSAs

The IRS has some good news for parents of adult kids who don't have health care coverage.

Under the recently enacted Patient Protection and Affordable Care Act (aka health care reform), parents can add their dependent adult children who are age 26 or younger to their medical insurance coverage. Technically, this option was to take effect on Sept. 23 or as soon after that date that an insurance plan renewed.

However, the IRS has ruled that such coverage can begin immediately. Actually, it said it could be effective retroactively to March 30.

The feds' early implementation ruling comes on the heels of decisions by many private insurers to go ahead and let their policy holders add their kids.

This move helps out a lot of graduating seniors who otherwise would be without coverage for a while, either until the new health care law provision kicked in or they got jobs (good luck with that, grads!) that provided insurance.

The IRS ruling, Notice 2010-38, also clarifies that where employer coverage begins early, it is not a taxable benefit. The age-26-or-younger coverage option is treated the same as any other existing health insurance benefit.

FSAs included, too: In addition to adding older children to insurance, the IRS ruling also allows workers who have medical flexible spending accounts (FSAs) to adjust their contributions to those tax-favored accounts.

This usually is allowed when there's a life changing event. The law change apparently qualifies as such.

So if mom or dad want to bump up their FSA contributions now, that's OK, too, with one big caveat. Your employer has final say on whether the FSA adjustment is allowable.

"The reason for using the word 'may' rather than 'can' [in the IRS notice] is because you are
eligible to make the midyear election change only if your employer
chooses to permit such changes," says Bob D. Scharin, senior tax analyst for the Tax & Accounting business
of Thomson Reuters.

I suspect that, despite some administrative headaches, many companies that offer FSAs will go with the time shift flow.

But even if your company
isn't flexible about flexible account changes, are you stuck, at least temporarily? Sort of.

But there's still one advantage under the new IRS ruling.

"Even if your
employer does not permit your changing your contribution level midyear,
you can still start receiving health care FSA reimbursements for
medical expenses incurred for the adult child," notes Scharin.

Evaluate your options: While most parents of older kids will probably take advantage of adding the young adults to policies, Your Money columnist Sandra Block examines whether putting these dependents to parental coverage is the best move.