PPACA Adult Child Eligibility and Imputed Income
FunHRBanker
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I am desperately trying to understand the Adult Child Eligibility and Imputed Income stuff in the Patient Protection and Affordable Care Act. This is taken directly from the IRS site link for publication Notice 2010-38 with regard to tax treatment of employer-paid health coverage for adult children under age 27.
The following examples illustrate this rule. In these examples, any reference to a “dependent” means a dependent as defined in § 152, determined without regard to §152(b)(1), (b)(2) or (d)(1)(B). Also, in these examples, it is assumed that none of the individuals are disabled.
Example (1). (i) Employer X provides health care coverage for its employees and their spouses and dependents and for any employee’s child (as defined in § 152(f)(1)) who has not attained age 26. For the 2010 taxable year, Employer X provides coverage to Employee A and to A’s son, C. C will attain age 26 on November 15, 2010. During the 2010 taxable year, C is not a full-time student. C has never worked for Employer X. C is not a dependent of A because prior to the close of the 2010 taxable year C had attained age 19 (and was also not a student who had not attained age 24).
(ii) C is a child of A within the meaning of § 152(f)(1). Accordingly, and because C will not attain age 27 during the 2010 taxable year, the health care coverage and reimbursements provided to him under the terms of Employer X’s plan are excludible from A’s gross income under §§ 106 and 105(b) for the period on and after March 30, 2010 through November 15, 2010 (when C attains age 26 and loses coverage under the terms of the plan).
Anyone else confused? In (i) they say that C is not a dependent, but then turn around and say he is a child (and therefore a dependent, right?!). Based on the new laws effective January 1, 2010, I thought that dependent children under age 27 were allowed on employers’ health plans regardless of student status, assuming the adult child is either not eligible for employer coverage or said coverage is more expensive than staying on their parents’ plan.
The following examples illustrate this rule. In these examples, any reference to a “dependent” means a dependent as defined in § 152, determined without regard to §152(b)(1), (b)(2) or (d)(1)(B). Also, in these examples, it is assumed that none of the individuals are disabled.
Example (1). (i) Employer X provides health care coverage for its employees and their spouses and dependents and for any employee’s child (as defined in § 152(f)(1)) who has not attained age 26. For the 2010 taxable year, Employer X provides coverage to Employee A and to A’s son, C. C will attain age 26 on November 15, 2010. During the 2010 taxable year, C is not a full-time student. C has never worked for Employer X. C is not a dependent of A because prior to the close of the 2010 taxable year C had attained age 19 (and was also not a student who had not attained age 24).
(ii) C is a child of A within the meaning of § 152(f)(1). Accordingly, and because C will not attain age 27 during the 2010 taxable year, the health care coverage and reimbursements provided to him under the terms of Employer X’s plan are excludible from A’s gross income under §§ 106 and 105(b) for the period on and after March 30, 2010 through November 15, 2010 (when C attains age 26 and loses coverage under the terms of the plan).
Anyone else confused? In (i) they say that C is not a dependent, but then turn around and say he is a child (and therefore a dependent, right?!). Based on the new laws effective January 1, 2010, I thought that dependent children under age 27 were allowed on employers’ health plans regardless of student status, assuming the adult child is either not eligible for employer coverage or said coverage is more expensive than staying on their parents’ plan.
Comments
There is a difference between an employee’s dependent child and an employee’s child under the Internal Revenue Code. An employee’s child may not necessarily qualify as an employee’s dependent under the Code. The PPACA extends the tax exclusion for employer-provided medical care reimbursements to employees’ children (as defined in Section 152(f)(1)) who have not reached age 27 at the end of the employee’s taxable year. Children under Section 152(f)(1) (an employee’s natural child, adopted child, stepchild, or eligible foster child) may not qualify as dependents under Code Section 152.
The new provision found in the health care reform legislation means that an employee’s child does not have to meet the tests described in Section 152 (age limit, support, residency, etc.) for purposes of tax-free coverage. (Such tests determine whether such a child is a dependent or not.)
I believe the example was trying to distinguish between children who meet the definition of dependents and those who do not.
In (i), the example says that C is not a dependent. I believe they mean C did not meet the requirements to be a dependent under Code Section 152. However, as (ii) of the example discusses, C qualifies as a child under Section 152(f)(1) (i.e., he is A’s natural child, adopted child, stepchild, or eligible foster child). This means, because of the PPACA, the health care coverage C receives under Employer X’s plan is excludible from A’s gross income.
I hope that helped! Also, if you are subscriber to our Benefits & Compensation Law Alert newsletter ( [URL="http://www.hrhero.com/benefitslaw.shtm"]http://www.hrhero.com/benefitslaw.shtm[/URL]), you will want to check out our June issue. The cover story is about how health care reform expands tax-free health coverage to new children.