November 16, 2004
BB 04—116

In this issue:

  • Treasury Issues Notice on Definition of Dependent for Health Plans
  • Senate Approves Bill to Reauthorize Funding for State High-Risk Health Insurance Pools

Treasury Issues Notice on Definition of Dependent for Health Plans

The U.S. Treasury Department has issued Notice 2004-79 stating the intent of the Internal Revenue Service (IRS) to amend the regulations for health plans that were affected by the change in definition of "dependent" included in the Working Families Tax Relief Act of 2004 (H.R. 1308). The notice was released to the media on November 17 and will be published in I.R.B. 2004-49, dated December 6, 2004. The changes to the definition included in the Act were intended to make the definition more uniform. However, because many other Code sections and regulations reference Code Section 152, the change in definition has broad implications for health, dependent care spending arrangements, hardship distributions from 401(k) plans, and unforeseeable emergency distributions from 457 plans and non-qualified deferred compensation plans.

After the definition of "dependent" was modified by the Act, the Council provided a comprehensive analysis of the unintended effects of the change on employee benefit plans to the Treasury Department as well as House and Senate Committee staff. We also urged swift action by the agency and Congress to clarify when individuals enrolled in various types of benefit plans meet the definition of dependent, an issue that required immediate attention because the recent changes by the tax legislation are effective January 1, 2005 and could adversely affect many individuals who have already made their benefits elections for next year.

Treasury's notice includes a statement that employers can rely on the notice until the IRS amends the regulations. As a result, most health plans (including Flexible Spending Arrangements and Health Reimbursement Arrangements) will not need to amend their plan definition of dependent (unless there was a specific reference to Code section 152). Treasury is expected to provide similar assistance in the final 401(k) plan regulations to be issued by the end of the year. Treasury is also expected to act on 457 plans by the end of the year but is not yet sure what form that guidance will take.

Also, as previously reported, the Council learned that Congressional committee staff are working with Treasury to prepare a technical corrections bill to fix some of the problems arising from the change of the definition of "dependent" related to Section 129 (dependent care plans) and Section 223 (Health Savings Accounts). The Treasury Department concluded that legislative action is needed to correct the dependent definition for these types of benefit plans and therefore the Notice issued today by the Department does not address dependents enrolled in HSAs or covered under dependent care plans. The Council has sent letters to the Chairmen of the Senate Finance Committee and House Ways & Means Committee urging them to consider the technical corrections bill during the lame duck session. The Council has also drafted a group letter and has asked other employer and health plan organizations to join us in supporting this effort.

While the goal is for Congress to consider the technical corrections bill during the lame-duck session that began on November 16, 2004, it is unclear if the effort will be successful since much of the focus of Congress will be on finishing the appropriations process and possibly approving an intelligence reform measure. For more information, please contact Susan Relland, Council health policy legal counsel, or Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

Senate Approves Bill to Reauthorize Funding for State High-Risk Health Insurance Pools

On November 16, the Senate approved by unanimous consent the State High Risk Pool Funding Extension Act (S. 2283), which would amend the Public Health Service Act to reauthorize federal funding for state high-risk health insurance pools and extend a high-risk pool grant program established by the Trade Adjustment Assistance Act of 2002. The insurance programs had expired on September 30, 2004. High-risk pools are created by states to help individuals who cannot otherwise obtain health insurance in the individual market due to preexisting conditions or can only obtain coverage at very high rates. HELP Committee Chairman Judd Gregg (R-NH) and Senate Finance Committee ranking Democrat Max Baucus (D-MT) sponsored the measure.

Under the bill, $15 million would be reauthorized to help states establish new high-risk health insurance pools and $75 million would be authorized to increase and extend funding for states that have already established high-risk pools. The bill was referred to the House Energy & Commerce Committee and it is unclear whether the House will consider the bill during this session. For more information, contact Maria Ghazal, Council director, health policy, 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.