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IRS Code Section 105(b)


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We are a CT employer and have had to cover dependent children to age 26 on our health insurance since 1/1/09. There are a dozen or so states that have this mandate. The PPACA (Health Insurance Reform Act) that was signed into law 3/23/10 will extend this coverage to all states effective 6 months from 3/23/10.

In the Reconciliation Act, there is a provision that makes this coverage non-taxable. One bulletin I rec'd says this is effective immediately. A blurb on the website of The Journal of Accountancy confirms that the Reconciliation Act changed the definition of dependent for purposes of IRC Sec 105(b) but does not mention an effective date.

This would mean that we no longer have to impute income for the value of the coverage. It also appears that medical expenses for these "adult dependents" could be reimbursed from an FSA/HRA/HSA.

Has anyone else looked into this? What have you concluded ?

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Have not checked the statute, but I read a summary that indicated it is effective for "plan years beginning on or after 09/23/2010".

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Have not checked the statute, but I read a summary that indicated it is effective for "plan years beginning on or after 09/23/2010".

I think that refers to having to cover the "adult dependents" on the health insurance plan. There appears to be more to this, though. This is from the Journal of Accountancy's website :

Adult Dependent

The Reconciliation Act changes the definition of “dependent” for purposes of IRC § 105(b) (excluding from income amounts received under a health insurance plan) to include amounts expended for the medical care of any child of the taxpayer who has not yet reached age 27. The same change is made in section 162(l)(1) for purposes of the self-employed health insurance deduction, in section 501©(9) for purposes of benefits provided to members of a VEBA, and in section 401(h) for benefits for retirees.

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I agree with your reading of the new law, which seems to say that, effective now, there need not imputed income for coverage of employees adult children. There are a lot of items in the new law that we need guidance on; this is one of them.

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  • 3 weeks later...
Guest RTMoore

Yes, it's effective as of March 30, 2010. See report prepared by the Joint Committee on Taxation, page 133: http://www.jct.gov/publications.html?func=...own&id=3673.

Note that it only changes IRC 105(b) (and some other provisions), not IRC 152. Also note that 105(b) doesn't seem to require that the "child" be a tax dependent. You'll need to consider your plan documents carefully as to whether this change will affect the plan.

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Yes, it's effective as of March 30, 2010. See report prepared by the Joint Committee on Taxation, page 133: http://www.jct.gov/publications.html?func=...own&id=3673.

Note that it only changes IRC 105(b) (and some other provisions), not IRC 152. Also note that 105(b) doesn't seem to require that the "child" be a tax dependent. You'll need to consider your plan documents carefully as to whether this change will affect the plan.

Thanks to the daily BenefitsLink H&W Newsletters I've found several advisories published by law firms that confirm that imputing taxable income on employees who cover overage dependents is no longer necessary effective as of 4/1/10. We forwarded the 1st one I found to our lawyers who agreed with that interpretation and we've stopped inputing income. They're still looking into what effect, if any, this has on employees using HSA funds for expenses incurred by overage dependents.

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This is good news for coverage of adult children to age 26 under federal (and apparently CT) laws.

However, check your own state's mandates.

If your state has decided to require coverage availability through age 26 and follows IRS imputed income rules, then you get to use your imputed income calculation skills during the last part of the child's last year of coverage, starting after the end of the taxable year in which the child reached age 26 and until the child reaches age 27 and is no longer covered.

Post #3 here:

http://benefitslink.com/boards/index.php?showtopic=37703

has some suggestions for handling the withholding.

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IRS Notice 10-38 has been published and confirms that benefits for currently covered dependents to age 26 are not taxable as of 3/30/10

http://www.irs.gov/newsroom/article/0,,id=222193,00.html

We're still trying to figure out if this applies to HSA funds. And we'll have to look at that age 26 - age 27 issue, too, GMK. In the meantime, our employees are very happy with their increased take home pay.

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