Effective March 30, 2010, The Patient Protection and Affordable Care Act and the Health Care and Education Tax Credits Reconciliation Act of 2010, amended the Internal Revenue Code (IRC) to provide that medical reimbursements made to an employee are not taxable with respect to any child of the taxpayer through the end of the year in which the child turns 26.
Generally, if an employer provided health coverage to a person who is not a tax dependent (as defined by the IRS) of an employee, then the cost of that coverage was taxable to the employee as imputed income.
Since 2008, Massachusetts has required insured health plans to extend coverage to an employee’s children up to age 26 or two years following the loss of dependent status under the Internal Revenue Code, whichever occurs first. Connecticut and New York, among other states, have enacted similar laws requiring coverage of children who may not qualify as federal tax dependents. In some cases, this has required employers to cover children who are not “dependents” of an employee under federal tax law, and impute income to the employee.
Effective March 30, 2010, the Act amends the IRC to provide that medical reimbursements made to an employee are not taxable with respect to any child of the taxpayer through the end of the taxable year in which the child turns 26, whether or not that child is a “ tax dependent.” A “child” is a son, daughter, stepson, stepdaughter, legally adopted child, or foster child placed with the parent by judgment or decree.
Practically, this means that Massachusetts employers no longer need to impute income with respect to children who have not attained age 27 by the end of a taxable year, even if those children do not meet the federal “dependent” definition.
Employers will need to continue to impute income with respect to certain other individuals who may be covered under a plan pursuant to state law or otherwise, but who are not “tax dependents” of the employee, such as same-sex spouses, domestic partners, or the children of either.
The IRC will also need to be amended to ensure that premiums paid by the employer with respect to any child of the employee who as of the end of the taxable year has not attained age 27 are likewise not included in the employee’s income.
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