Reminder of Potential Income Tax Implications of the Illinois Dependent Age Expansion Law
It may be easy to overlook the potential income tax implications of the Illinois Dependent Age for Health Care Coverage Legislation (Public Act 95-0958). Similar to domestic partner coverage, plan administrators and employees’ covering adult children should be aware that the Illinois law may conflict with the definition of a dependent under federal income tax law for health insurance purposes.
In some cases, an adult child may not meet the criteria of a “qualifying child” or “qualifying relative” dependent under the Internal Revenue Code. (If your child is over age 19 and is not a full-time student, or is not totally and permanently disabled and you provide less than one half of their support, they probably do not meet the IRS “qualified” definition.) If the “qualifying child” or “relative” criteria is not met, the employee will be required to pay for that child’s coverage on an after-tax or imputed income basis. The employee’s imputed income amount is determined by assessing the Fair Market Value (FMV) of the health benefit coverage provided to the non-qualified child and is subject to income tax withholding and payroll taxes. The FMV of the coverage is the amount that an individual would have to pay for that coverage in an “arm’s length transaction”, which is generally accepted as the COBRA rate for single coverage.
Please keep in mind that health care expenses for a “non-qualified” dependent are not reimbursable under a health care Flexible Spending Account.
So, to summarize:
- If your adult child is an IRS “qualified” dependent, it is likely that your payroll deductions for your child’s premiums will be made on a pre-tax basis under the same structure used for other “qualified” dependents.
- If your adult child is not an IRS “qualified” dependent, it is likely that your child’s health coverage is subject to federal taxation as described above.
It is strongly recommended that employers consult with a professional legal or tax advisor about the details of these implications.
