Dependent Eligibility

I hope this doesn't get too long. We have just done our annual "open enrollment" when we begin a new plan year. Something came up about whether an employee could cover a dependent. When we got to looking into it, I discovered we have dependents covered under our plan that look as if they shouldn't be. (We are self insured, with a PPO and a Section 125 as the "wrap document", by the way).
First, I was trying to find out how other employees handle dependent children... do you allow ALL biological children or do they have to live with employee/insured? What about step children? Any parameters?
What ocurred with us is the definition in our Plan pretty much mirrors the IRS Code.Title 26, Subtitle A, Chapter 1, 152.. for definition of denpendent.
Simply put, the "qualifying child" (relationship in paragraph 2, )if all are met:
1)related to taxpayer/insured described in paragraph 2
2)same principal place of abode more than 1/2 of taxable year
3) meets the age requirements (19/24)
4)taxpayer/insured provides 51% or more of suport.
Our Plan allows:
1) employee's natural born children;
2) adopted children
3) Legal guardianship children
4) step/foster children that live with insured and 51% or more of support.
Also, if employee/insured has a QMCSO, they are immediately eligible.
The problem we came up with is that we have covered biolgical children who don't live with insured, not covered by order, and/or don't pay 51%of support are not covered under the 125 Plan. Also, no step children are allowed under our plan unless they live with insured and pay 51% of support/claimed on taxes (can't file separate taxes or won't be claimed under employees). (Even if QMCSO in force, it isn't filed on employee/insured but on spouse so not eligible.) If divorce decree or child support order requires the non-custodial parent to maintain the insurance, it doesn't mean they have to be covered under our plan.
If we do open it up to any other than the ones defined by our Plan and the 125 Plan (which doesn't address step children, we will have to "build up" the employee's taxable income for the fair market value of the benefit.
Also, to what decree do we want to "open it up". Some feel we should let biological children no matter where they live, who looks after them. Some feel that if a divorce decree/child support order for spouse of employee, we should allow them, even though not eligible under 125?
Anyway, we have had to leave things as they are currently (even know we know they are wrong) and try to qualify our definition of Dependent and then detemrine the taxability of what we allow.
(This is what we were told by a Benefits Attorney)
Any suggestions on what is fair and what you do?
Does anyone do a Fair Market Value (FMV) tax build up on any of your employees?
E Wart


  • 4 Comments sorted by Votes Date Added
  • Our plan covers children, step-children, or foster children living in the home or enrolled in a qualified school (college). If the children do not live in the home, there must be a court order in place for the children to be covered. We do not look at the 51% rule.

    Under prior ownership our plan was worded a little differently. We would not cover any dependents who could get coverage elsewhere. We had a situation where the children lived with the mom (our employee) and the father was to supply insurance per court order. The court order meant our employee could not cover the children; it was the father's obligation. The father did not provide insurance, and if the mom tried to go to court he would simply leave his job for another (didn't pay child support either). This left the mom responsible for the bills but no way to cover the children. She went to our board to ask for an exception, and they agreed to cover the children. At the next opportunity we reworded the definition of dependent.

    Good luck!

  • Do you require the "court order" to be a QMCSO on the employee (which is almost impossible if step child) or do you take any type of court order?
    Also, since your guidelines may not fall within the 125 plan, if you have one, how do you handle the Fair Market Value of the coverage?
    E Wart
  • Boy do I feel dumb! It has been so long since this has been an issue that I had to go look it up. We are a small company (14 employees) who shares a plan with our parent company. They have reworded the definition of dependent since I last looked and it does require that the employee provide more than 1/2 the support and/or claim the child on their income taxes. Also states you must have legal custody, legal guardianship, or court-ordered coverage of the child.

    'A newly adopted child is considered a dependent from the date of Placement and will continue as such unless the Placement is disrupted prior to legal adoption and the child is removed from Placement.

    Also includes any child under a QMCSO or NMSN as defined by applicable law.' (paraphrased)

    If we did cover someone outside the section 125 guidelines, calculating the taxable portion would not be difficult. As part of our agreement with our stop loss carrier/TPA, we are provided with rates. We use the rates to calculate COBRA, but they could certainly be used to calculate the portion of the premium that does not qualify for section 125.

    IE: Employee takes Employee plus 1 insurance (to cover partner).

    Employee Plus 1 rate less Single rate equals the amount that does not qualify for section 125. Two amounts would be withheld from their check (on our system). A single rate under section 125, and the calculated amount as a regular deduction.

    Clear as mud? And employees think this job is easy!

  • Thanks for your input. sounds like you and I are on the same track.... I hadn't looked in forever either. Sounds like your step children aren't covered either unless living with employee (51% of support... or that EMPLOYEE has court order, which I bet it is the spouse, not employee.)
    By the way, we are self insured too. Our brokers' benefit lawyer said you don't have to charge them for it, but you do have to build up their taxable earnings like a W2grp (Life insurance over $50,000.)
    I know we haven't finished this mess... we are just a holding now.

    E Wart
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