How is State Tax Applied to Coverage for Adult Children Under the PPACA?

March 8, 2011 (PLANSPONSOR.com) – This week’s question; how is employer-provided health coverage provided to adult children up to age 26 under the new PPACA requirement taxed for state tax purposes?

 

By PS

Answer:

In general, PPACA requires all employer-sponsored health care plans (including grandfathered plans) to cover adult children until they reach their 26th birthday, effective for the first plan year beginning on or after September 23, 2010.  Last April, the IRS issued Notice 2010-38, which, among other things, extends the federal tax exclusion for employer-provided health coverage provided to adult children through the end of the year in which the child reaches age 26, regardless of whether the child is the employee’s dependent within the meaning of Internal Revenue Code (Code) section 152.  This means that the age limit, residency, support, marital status, and other tests in Code section 152(c) do not apply to such a child. 

Although employersponsored coverage provided to adult children is excludable from income for federal income tax purposes, it may not be excludable for state tax law purposes.  A large number of states (over twenty plus Puerto Rico) do not automatically adopt the current version of the Code, and therefore there is the risk that employers will need to impute income to their employees for state tax purposes.  To the extent such coverage is taxable for state law purposes, it could trigger wage reporting and withholding requirements (and related penalties and interest for failures) for employers based on the fair market value of the coverage.

State tax laws regarding the tax treatment of adult child coverage have been changing rapidly, so employers should carefully monitor developments in their state(s).  For example, California recently posted information on its Employment Development Department and Franchise Tax Board websites regarding how employers should report and calculate the imputed income of health benefits for adult children on the Form W2, box 16, for California state tax purposes.  Subsequently, the California Employment Development Department removed the posting after a bill was introduced in the State Legislature that would make the California state tax code conform to the Code on this issue. 

In addition, the Governor of Virginia recently signed a bill that updates the Virginia Tax Code so that it generally conforms to the Code as of December 31, 2010.  As a result, Virginia employers should not have to impute the value of adult dependent coverage for state tax purposes beginning in 2011.

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You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html    

Contributors 

Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C.  She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare.  She represents employers designing health plans as well as insurers designing new products.  Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.

Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm’s Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.

 

PLEASE NOTE:  This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

 

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