Welfare Benefit Plan ERISA News
June 2011

Understanding PPACA can be Very Taxing

PPACA requires all group health plans (whether or not fully insured) to make dependent coverage available until age 26-regardless of the child's status regarding residency, support, marital state, student enrollment or eligibility for other health coverage. [1] And, according to IRS Notice 2010-38, the IRS will exclude from income both premiums paid through IRCĀ§ 125 Cafeteria Plans as well as coverage for medical care reimbursements under health FSAs and HRAs relating to a participant's child all the way up to age 27-if the plan extends coverage until that age

Thus, both premiums paid for coverage and amounts reimbursed for an employee's child who has not attained age 27 as of the end of the year are permissibly excluded from the employee's gross income and are not wages for FICA and FUTA purposes. The IRS will also extend the list of eligible change in status events for cafeteria plans, FSAs, and HRAs to include nondependent children under age 27 becoming newly eligible for coverage. To take advantage of these tax exclusions, it is likely the applicable plan(s) will need to be amended to reflect this new definition of child (or dependent). The tax treatment for other non-tax dependents, such as domestic partners, has not changed. Source

PPACA provides favorable federal income tax treatment on certain health benefits. However, the states of Georgia, Hawaii, Indiana, Minnesota, and Wisconsin do not conform to federal income tax law regarding dependent age limits. Employers in these states may need to impute income on the COBRA equivalent premium and possibly withhold state taxes from employees covering dependents who do not meet the applicable state's definition of a tax dependent. Source.

[1]One limited exception, which will no longer be available in 2014, applies solely to grandfathered health plans where a child is eligible for other employer-sponsored health coverage.


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