October 13, 2004
BB 04—108

In this issue:

  • New Definition of "Dependent" Affects Health Plans
  • FASB Delays Effective Date for Stock Option Expensing Proposal
  • CMS Announces October 26 Webcast on Employers' Medicare Options

New Definition of "Dependent" Affects Health Plans

On October 4, President Bush signed into law the Working Families Tax Relief Act of 2004 (H.R. 1308) which extends several expiring tax provisions. Notably, the Act also significantly changes the definition of "dependent" in Section 152 of the Internal Revenue Code (Code) for many tax purposes and extends the definition to several Code provisions that provide tax benefits to taxpayers with children (e.g., personal exemption for dependents, dependent care credit, earned income credit, etc.) This change is designed to make the definition of dependent more uniform for these various provisions. However, because many other Code sections reference Code Section 152 (including Code Section 105(b), which allows a taxpayer to exclude amounts received from his employer to reimburse him for medical expenses of his dependent), the change in definition has broad implications. This change in definition, which takes effect December 31, 2004, affects health plans and Dependent Care Spending Arrangements (DCSAs) in the following ways:

Health Plans: Under the new age requirement in Section 152, an individual is a qualifying dependent child if the individual has not attained the age of 19 as of the close of the calendar year or is a full-time student who has not attained the age of 24 as of the close of the calendar year. Plans often have a similar limitation, but Code Section 152 has not contained an age limitation in the past. Employers will need to review and possibly revise their health plan definitions for eligible dependents to conform to these new rules; as a practical matter, the new definition will probably need to limit eligibility to age 18 and 23 due to the operation of the "close of the year" language. However, fully-insured plans may have an additional issue. Some state laws require insured plans to provide coverage later than age 19 and 24 for students. In those cases, the plans will need to continue providing coverage but the coverage will not be available on a tax-advantaged basis.

Dependent Care Spending Arrangements: For the first time, adult dependents as defined in Section 152 will be subject to a gross income limitation ($3,100 for 2004). If the individual makes more than that amount, he cannot be a dependent. While the technical and conforming amendments eliminate the gross income limitation for non-child dependents for a number of Code sections, including many benefits-related sections, it does still apply to DSCAs. This may create problems for those who use DCSAs to provide day care services for adult dependents, such as their parents. In addition, Code Section 21(b) used to provide that the dependent adult had to spend at least eight hours per day in the taxpayer's home. That section has been amended so that now the dependent must live with the taxpayer for at least half of the tax year.

The Council is working to see if the Department of Treasury will be issuing guidance on these new provisions of the Code. If so, the Council will be providing comments to try to help ease the transition to the new benefit rules. For more information, contact Susan Relland, Council health policy legal counsel, at (202) 289-6700.

FASB Delays Effective Date for Stock Option Expensing Proposal

On October 13, the board of the Financial Accounting Standards Board (FASB) decided on an effective date for its proposed Stock Option Expensing standard, essentially providing a six-month delay for companies can adopt the new standard. The standard requires companies to expense all stock options and will be applicable to options granted, modified or settled after June 15, 2005. Two Board members voted against the six-month delay, favoring a one-year delay. FASB had received numerous comments from employers requesting this delay, since many plan sponsors also face simultaneous regulatory changes resulting from the Sarbanes-Oxley Act passed in 2002.

Still pending in Congress is the Stock Option Accounting Reform Act (H. R. 3574), which would require expensing for the top five executives of a company but not for stock options provided to other employees. The bill would effectively block FASB's proposal until a study of the economic impact of expensing is conducted. H.R. 3574 passed the House of Representatives on July 21 but faces considerable opposition in the Senate, particularly from Richard Shelby (R-AL), chairman of the Senate Banking, Housing and Urban Affairs Committee, which has Senate jurisdiction on this issue.

For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

CMS Announces October 26 Webcast on Employers' Medicare Options

The Centers for Medicare and Medicaid Services (CMS) has announced it will host a nationwide Webcast on October 26, 2004, from 2:00 to 4:00 p.m. (Eastern Time) for employers to provide more information on the provisions of the Medicare Prescription Drug, Improvement and Modernization Act (MMA) dealing with retiree drug coverage. CMS encourages questions to be submitted in advance of the Webcast; you may do so via email to  CMS also hopes employers and others in the benefits community will view the webcast from the CMS regional offices as an opportunity to meet agency staff.

The Webcast will focus on opportunities for employers to continue providing coverage to their retirees, including the subsidy, wrap-around coverage, and options for becoming a prescription drug plan (PDP). Under the proposed rules, employers may choose to receive a subsidy for offering retiree prescription drug coverage which is at least "actuarially equivalent" to Medicare drug benefit scheduled to begin January 2006. For employer-sponsored plans that qualify for the subsidy in 2006, Medicare will pay 28 percent of allowable costs for prescription drug claims above $250 and below $5,000 which are incurred by Medicare-eligible individuals enrolled in the employer's plan. Employers can also choose to coordinate their retiree drug benefits with the new expanded coverage under Medicare including by contracting with health plans participating in the new Medicare Advantage program to exclusively serve the employer's own retirees. Finally, employers can use waiver authority to provide Medicare, and perhaps supplemental, benefits to retirees on a self-insured basis by becoming a PDP.

We expect additional details from CMS to be provided soon, including the slides to be used during the Webcast, dial-in instructions, and the location of CMS regional offices where employers or others may view the Webcasts if they choose. We will provide this information as soon as it is available. For more information, please contact Paul Dennett, Council vice president, health policy, or Susan Relland, Council health policy legal counsel, at (202) 289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.