When to kick your adult child off your health plan
Under Obamacare, parents could keep their adult children on their plan until they were 26. But next year those 20-somethings can get their own plan. What then? It's complicated.
When Rob Wyse’s 22-year-old daughter received the offer letter for her first post-college job this summer, after the congratulations the family had a decision to make: Should they keep their daughter on the family health-insurance plan or tell her to get her own?
It doesn’t cost much for Mr. Wyse, a New York communications professional, to enroll his daughter in his plan, which also insures his wife. But the daughter’s new job is in Maryland, where doctor visits would be reimbursed at lower out-of-network rates under the Wyses’ New York-based plan, meaning her out-of-pocket costs would be higher. While she is healthy, she has had two knee injuries that required surgery. Her employer’s premiums, however, might be higher than her parents’.
Many families are crunching the numbers on various such scenarios, now that the Affordable Care Act, or ACA, presents young adults in particular with more health-insurance options than they had before.
Since 2010, the ACA has required insurers to allow dependents to stay on their parents’ plan until age 26, even if they have a job with benefits. In 2014, young adults will also be able to buy insurance on the new state exchanges if they can’t get affordable coverage (costing 9.5% of income or less) through an employer. (This assumes, of course, that the young adult complies with the ACA; another option is to skip insurance and pay the penalty.)
“Three years ago, (health-insurance options) wouldn’t have been a discussion in our house,” Mr. Wyse says.
Generally, for a two-parent family with at least one child under 26, keeping the young adult on the family plan is the best option in terms of both price and quality -- sometimes even if the child can get coverage through a job, insurance experts say. That’s because many employers charge workers a family rate for insurance, and employer plans typically offer better coverage than individual plans.
There’s another benefit: Since employer health-plan premiums are withheld from salaries, parents also may get a tax benefit for paying more to insure additional children, especially if the contribution pushes their taxable earnings below the Social Security tax cap of $113,700 a year, or reduces their Alternative Minimum Tax liability.
But while many families will find it worthwhile to keep kids on the parents’ health plan, that won’t always be the case. Here are some of the issues they need to consider as they make their decision.
Plan status: Is the parents’ plan exempt from ACA rules?
There’s an exception that would prevent working young adults who have their own health benefits from taking family coverage this year: Their parents are enrolled in a “grandfathered” health plan, meaning it is exempt from some ACA rules until 2014.
Grandfathered plans are those that existed on or before March 23, 2010, and have basically stayed the same since. More than one-third of those who get health insurance through a job are enrolled in one, according to the Kaiser Family Foundation.
But by next year, grandfathered plans will also have to cover adult dependents even if they can get insurance through an employer.
Geography: Does the young adult live in a different state?
Young adults can stay on their parents’ plan after they leave the nest, even if they are married -- and they need not be claimed as a dependent on their parents’ tax forms. But if the child lives far away, local doctors may be out of the family plan’s network, meaning out-of-pocket costs could be high.
If young adults are healthy and the cost of their parents’ plan is significantly lower than what they could get on their own, they might schedule routine doctor visits for when they come home and use the family insurance only for emergencies in their own state.
Age: How old are the parents and young adult child?
Some carriers allow young adults to stay on their plan until age 30; others drop them on their 26th birthday, and still others allow them to stay through the end of that calendar year or until they turn 27. It may be simpler for kids close to the cutoff age to get their own insurance to avoid having to start the whole process over again in a few months or aging out of their parents’ plan before they can get their own coverage, experts say.
Families should also consider whether the adult child is married or planning to start a family soon.
The parents’ plan won’t cover in-laws or grandchildren.
Medicare won’t cover kids of any age, which is something to keep in mind if the parents are approaching age 65 and planning to retire.
Cost: What does the employer pay toward dependent coverage?
While the ACA forces employers to offer health insurance to dependent children until age 26, it doesn’t require them to pay for any part of that coverage. Firms do have to cover enough of their employees’ insurance to make it affordable under the law, but they can cut back on what they pay for the kids. And in fact, 71% of employers raised dependents’ premium contributions in recent years -- with increases outpacing those of employees’, according to consulting firm Towers Watson & Co.
In general, if a family is already insuring one child, it won’t cost much more, if anything, to add another young adult, as most employers charge the same family rate for any number of kids, or raise the premium incrementally beyond three. It would be more expensive for a single parent to add a young adult to the health plan than it would be for a two-parent family already insuring a spouse, says Bryce Williams, head of Towers Watson’s exchange solutions, which will sell federally subsidized health insurance in 2014 in addition to other plans.
But if employers charge extra for each dependent, as 15% say they will do next year, that could tip the scale in favor of an exchange plan.
Earnings: How much does the young adult earn and is he/she claimed as a dependent?
Some young adults might get a better deal buying health insurance through the exchanges that open Oct. 1, especially if they qualify for a government subsidy.
But only those who can’t buy affordable health insurance through a job are eligible for subsidies. And while 20-somethings generally pay less for health coverage because of their age, they also will get smaller tax credits than older workers: A 25-year-old would have to make $33,000 or less to get a subsidy, while a 50-year-old earning $45,000 could receive $1,115 back, according to the Kaiser Family Foundation’s eligibility calculator.
Because subsidies are determined by household income, the cost of an exchange plan depends not only on the young adult’s salary, but also on whether the parents claim that child as a dependent. Families might consider scratching 20-somethings with modest earnings off their tax forms and sending them to collect their subsidy on the exchange, says Carrie McLean, senior director of customer care for eHealth Inc., the online insurance broker.
On the other hand, if parents also are buying on the exchange, including a nonworking or low-earning young adult could qualify the whole family for subsidies because household income is then stretched across more people. A 55-year-old couple earning a combined $78,000 wouldn’t be eligible for subsidies, but if they included their jobless 25-year-old, they could receive more than $9,000 in tax credits.
Privacy: How much does the child want parents to know?
For all of our medical privacy protections, there is a loophole: While doctors themselves keep visits confidential, they send bills explaining the services provided—-and it isn’t always the patient who opens them. When young adults stay on the family health plan, often it’s their parents who end up reading the medical bills.
“They don’t necessarily want their parents to know when they’re seeing a doctor and what for,” says Ms. McLean.
More from MarketWatch:
- 10 things Gen Y won't tell you
- 6 things boomers need to know about Obamacare
- Retire early thanks to Obamacare?
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