Illinois Insurance Update

Effective June 1, 2009, all individual and group health insurance and HMO contracts (including dental and vision) that offer dependent coverage must follow a new Illinois law which gives a person with an insurance policy that covers dependents the right to elect coverage for qualifying dependents (even if they are not full-time students) who are not married up to age 26 or up to age 30 for unmarried military veteran dependents who are Illinois residents. This will take effect for new insurance policies issued on or after June 1, 2009. For example, for a plan with a January 1 open enrollment date, this new law will first take effect beginning January 1, 2010. The new law does not require employers to pay the cost of the dependent coverage or to provide dependent coverage if not previously provided.

An unmarried individual who meets the age requirements above can be eligible for dependent coverage under this new law even if that person cannot be claimed as a dependent on the employee's income tax return. However, if the dependent does not meet the IRS definition of a dependent under IRC Section 152, the employee will need to be taxed on the fair market value of the portion of the insurance premiums related to that individual that are paid by the employer. Employers need to verify at the time of enrollment that tax-free health coverage is appropriate and that only tax free treatment provided to the employee includes spouses and dependents as defined under IRC Section 152. The taxation of the imputed income related to these premiums protects the tax free treatment of the reimbursements received under the plan.

Currently, the IRS has not offered an formal guidance on the calculation of the fair market value, other than the information offered in PLR 200339001 and PLR 9603011 which references the treatment of coverage for Domestic rule would be to follow a reasonable method for calculating the fair market value using an actuarial computation that could be done by your insurance provider or using the greater of the increase in incremental cost of coverage or COBRA premiums for self-only coverage.

If you have questions about this new law and how it will work for your particular situation, we recommend that you contact your carrier directly for clarification on the matter as it pertains to your situation and their policies.

Information was received via Sikich LLP, Certified Public Accountants and Advisors