On Tuesday, March 30, 2010, President Obama signed into the law the Health Care and Education Reconciliation Act of 2010 (the “Act”). The Act amended federal tax law so that employers can offer tax-free health insurance coverage to adult children of employees during those taxable years in which the children are age 26 or under for the entire taxable year, whether or not those children are tax dependents for federal income tax purposes. For purposes of the new law, “child” means an individual who is a son, daughter, stepson, stepdaughter or eligible foster child of the taxpayer (employee).
Under the Act, this change is immediately effective and has an immediate impact on many Wisconsin employers. Under Wisconsin law effective on January 1, 2010, employers with group health plans covered by Wisconsin insurance carriers (and self-funded public sector health plans) that offer dependent health insurance coverage to their employees must include coverage for certain adult dependent children up to age 27. When Wisconsin’s new law went into effect, federal tax law required employers to impute as income, to employees covering children who were not tax dependents, the fair market value of health insurance coverage provided to such non-tax dependents. In many cases, adults dependent children that obtain coverage pursuant to Wisconsin’s new law are not tax dependents for federal income tax purposes.
However, the Act amended federal tax law and, effective March 30, 2010, employer-provided health insurance coverage provided to adult children who are age 26 or younger during an entire taxable year is now tax-free to employees, whether or not the adult children are tax dependents for federal income tax purposes.
Thus, Wisconsin employers providing health insurance coverage to adult dependent children up to age 27 are no longer required to impute income to an employee with respect to such coverage or withhold taxes on the fair market value of such coverage except for those taxable years in which a covered child turns 27.
The change in the tax code, however, is not retroactive. Accordingly, the fair market value of coverage provided between January 1, 2010 and March 30, 2010 for a child who was not a tax dependent continues to represent taxable income. Employers will still need to treat such coverage as imputed taxable income to the employee for this time period and report it as such on the employee’s Form W-2. Employers should immediately review their payroll practices for imputing income and withholding taxes and make the adjustments necessary to comply with the Act.
As employers make these adjustments, questions may arise regarding application of the change in the federal tax law, with its March 30, 2010 effective date, to their payroll practices for imputing income and withholding taxes. Michael Best & Friedrich can provide guidance to employers as they adjust their payroll practices to comply with the Act.