When Health Plans Aren't Required to Cover Adult Children

Although the health-reform law requires most insurance plans to extend coverage to adult children until age 26, the rule doesn't apply to retiree-only plans.

I have retiree health insurance from my former employer. The insurer says it can drop my son’s coverage if he stops being a full-time student because he is older than 19. I thought the new health-care-reform law required employers to provide coverage to children until they reach age 26. Who is right?

Your former employer is right on this one. Even though the health-care-reform law requires most insurance plans to extend dependent coverage to adult children until age 26, there’s an exception for retiree-only health insurance plans. Health plans that cover only retirees (not those that cover current employees or a combination of current employees and retirees) are not subject to the rules requiring dependent coverage to last until age 26.

However, some retiree-only plans must follow state laws for dependent coverage, which may set different age requirements. The rules depend on whether the health plan is “fully insured” or “self-insured.” Fully insured plans, which have coverage provided by an insurance company rather than being self-funded by the employer, must comply with state laws, and some states require health plans to cover dependents after graduation up to a certain age generally in the mid twenties. The rules and ages vary by state; see the Kaiser Family Foundation’s State Health Facts for details. “These rules do not require the plan to offer dependent coverage, but if the plan does offer dependent coverage, it must comply with the state requirements,” says Pearce Weaver, of Fidelity Benefits Consulting.

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But many retiree-only health plans -- especially those offered by large employers -- are considered to be self-insured plans, which means that the employer uses its own money to pay claims and uses an insurance company only for administration. In that case, the plan isn’t required to follow the state laws for dependent coverage. “The employer can set up the eligibility requirements however it wants,” says Weaver. The employer could offer retiree-only coverage with no dependent coverage, or it could cover dependents to age 19 or set another age restriction, just as it could do before the health-care-reform law was passed.

Because an insurance company may do the administration for a self-insured plan even if your employer is actually providing the money to pay claims, it’s not always obvious whether your retiree-only plan is considered to be fully insured or self-insured. Ask the benefits office which rules apply to your plan.

For more information about finding coverage for new grads, see How to Keep Recent Grads Insured.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.