UPDATE: Health Care Reform Bill Has Tax Implications for Employers and Employees Who Elect Health Care Coverage for Their Dependent Children
Update (5/13/2010) - The Wisconsin Department of Revenue has clarified the Wisconsin tax impact of the change in Federal income tax treatment of the cost of health care coverage for older children who are covered under a parent's health insurance plan. For the Federal changes to apply for Wisconsin income tax purposes, Wisconsin will need to adopt conforming legislation. Wisconsin has not yet done so, and because the legislature is currently adjourned, conforming legislation (if any is adopted) will most likely not be passed until the 2011 tax year. If conforming legislation is adopted, it is unlikely that it will be made effective retroactively. This means that for Wisconsin income tax purposes, unless and until Wisconsin adopts conforming legislation, employers will have to impute income to certain employees who elect coverage for their older children who do not qualify as "dependents" under the Federal tax code (as described in a previous article on this, available here.) At the same time, as described below, employers may not have to impute income to those same employees for Federal income tax purposes. The Wisconsin Department of Revenue has posted on its Web site an explanation of this issue (http://www.revenue.wi.gov/taxpro/news/100727.html ), which includes directions regarding how employers should report any imputed income on an employee's Form W-2.
The recently enacted federal health care reform legislation contains a provision that will expand the availability of dependent coverage to children through age 25. Under the provision, group health plans and health insurers offering individual or group coverage to dependent children must make that dependent coverage available until the child reaches age 26. For calendar year plans, this provision will take effect beginning with the 2011 plan year.
The health care reform legislation also made a corresponding change to the federal tax code to exclude from income amounts paid for the expanded dependent coverage. Specifically, this change excludes from income any amount paid for the health care coverage of a dependent child who will not reach age 27 by the end of the tax year. This means that if an employee elects coverage for a dependent child who will not reach age 27 by the end of the tax year, then the cost of coverage for that child does not need to be included in the employee's gross income.
Note that this change does not alter the definition of "dependent" under the federal tax code. There is, however, an additional provision in the health care reform legislation that allows self-employed individuals to exclude from income amounts paid for the heath care coverage of their dependent children.
Important and Immediate Implications for Wisconsin Employers
The amendment to the tax code described above has important and immediate implications for Wisconsin employers. As was discussed in a previous article, Wisconsin recently enacted a law that requires certain insurers to offer coverage for dependent children until those children reach age 27 (and for longer in some cases involving children who are called to active military duty). As the article explains, one implication of that law is that it requires insurers to offer dependent coverage to certain children who do not meet the definition of "dependent" under the federal tax code. Thus, the article notes, the law has tax implications for employees who elect coverage for children who do not qualify as "dependents" under the federal tax code, because those employees must recognize the value of that coverage as part of their taxable income. The article also explains that employers of such employees are required to impute income to the employees equal to the fair market value of the coverage elected for any children who do not meet the definition of "dependent."
The passage of the health care reform legislation will eliminate these consequences in many situations. Although the legislation does not change the definition of "dependent" under the federal tax code, it does exclude from income amounts paid for the health care coverage of a child who does not reach age 27 by the end of the tax year. Thus, coverage provided for a child who meets this requirement will not count toward an employee's income, even if the child does not meet the definition of "dependent." This means that both the tax consequences for the employee and the imputed-income requirement for employer will be eliminated. Moreover, unlike the requirement to offer dependent coverage to children through age 25, the change in the tax code became effective immediately upon the President's signing the Health Care and Education Reconciliation Act of 2010 on March 30, 2010. This means that after the date of passage of the Reconciliation Act, employers who have been imputing income for coverage provided to children of their employees may stop imputing income for those children who will not reach age 27 by the end of the tax year.
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