October 19, 2010 – Updated Certification of Dependent Status For Tax Purposes Now Available
Changes in the Law. As part of the federal health care reform legislation, Congress amended Section 105(b) of the Internal Revenue Code (the “Code”) to expand the categories of individuals with respect to whom group health plan coverage can be provided on a tax-free basis. Section 105(b) now provides that coverage for a child is not included as taxable income to the employee as long as the child has not reached age twenty-seven (27) by tax year end. For purposes of this expanded exclusion, “child” includes natural, stepchild, adopted child, foster child, or child placed for adoption. In many instances, this eliminates the need to consider factors such as financial dependency, residency, marital status, etc.
Important: The tax consequence issue is separate from the requirement that major medical plans provide coverage until a child reaches age twenty-seven (26).
This expansion of Section 105(b) also allows sponsors of health flexible spending accounts (health FSAs) and health reimbursements arrangements (HRAs) to expand the definition of dependent used in those plans for purposes of defining eligible expenses.
Note: Section 105(b) “allows” a plan to use the expanded definition; but, it does not require it. Care should be taken in reviewing current plan language. It may need to be amended.
Changes to Our Form. Based upon the expansion of Section 105(b) of the Code, we have revised our Certification of Dependent Status form. The updated form is available on our website (https://www.hitesmanlaw.comlibrary/). This form can be used to: (1) determine whether the value of coverage provided under a group health plan to a dependent is excludable from the employee’s income for federal income tax purposes, and/or (2) determine whether a medical expense incurred by someone other than the participant can be reimbursed under a health FSA or HRA (provided such plan defines dependent in accordance with the amended Section 105(b)).
Caution: The updated form is not intended to be used to determine whether an individual is eligible for dependent coverage under a major medical plan. As noted above, the coverage issue is separate from the tax issue. However, this form can be used to determine whether the coverage provided is excluded from the employee’s taxable income.
Because there currently is a difference between certain state definitions of taxable income and the federal definition of taxable income, we have prepared a separate Certification of Dependent Status for State Income Tax Purposes. This form is also available on our website (https://www.hitesmanlaw.comlibrary/). Some states, including Minnesota, have not yet updated their laws to incorporate the changes made to Section 105(b) of the Code. In those states, the issue of whether covering a dependent creates state taxable income for an employee is determined based upon the old definition of dependent found in Section 105(b) (i.e., the modified definition of tax dependent from Code Section 152). The income exclusion for state income tax purposes will not automatically be available in these states for all children who are under age twenty-seven (27) as of the end of the tax year. Unless and until the applicable state law is amended to incorporate the change to Section 105(b), employers in these states should use this additional certification to determine whether the value of a dependent’s coverage is includable in income for state income tax purposes.
Please contact us if you have any questions regarding the contents of this Alert.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.