How will the new definition of dependent (Working Families Tax Relief Act) affect plan eligibilityfor dependent children?

[Guest Livia]

Under the Working Families Tax Relief Act, there is a new definition of dependent for purposes of Code Section 152. This definition provides that a "child" must, among other things, satisfy age requirements. In general, the child must either (i) not have attained age 19 as of the close of the calendar year or (ii) is a student who has not attained age 24 as of the close of the calendar year. Disabled children are deemed to satisfy these requirements automatically.

The problem is that many existing health plans have traditionally used differing definitions of dependent to determine eligiblity. It seems to me that if a health plan that offers health benefits to an employee's child who does not fit the new Code Section 152 definition of dependent child, the value of those benefits will be taxable. Is there a solution other than conforming the health plan definitions to the new code section 152 definition?

[traveler]

I was wondering the same thing myself. I do agree that if an employer is providing medical coverage to an individual who is not a "dependent" of an employee, then the coverage is taxable income.

Note, the new Section 152 definition of dependent includes a "qualifying child" and a "qualifying relative." A qualifying child includes a student who has not attained the age of 24 as of the close of the calendar year. A qualifying relative can include a child who has gross income of less than the exemption amount (currently $2,000) and for whom the parent pays over half of the individual's support. As I see it, the $2000 gross income amount will be the problem. I would expect that a summer job would put the student over that limit.

I have yet to see this issue addressed by any of the TPA's, although the changes are effective next year. For one client, we are considering leaving the age 25 limit but adding the requirement that the employee will only enroll a child if the employee can claim the child as a dependent on his or her income tax return.

What is everyone else doing?

[Guest NBas]

The gross income test will be set to an amount exceding the personal exemption for the taxable year. For 2004 that amount is $3,100.

Additional questions for you.

Does a Domestic Relations Order, either voluntary or involuntary, overwrite the residency requirements?

Does the Employer or Employee have the responsibility for compliance?

[Guest terryh123]

See IRS Notice 2004-79, which gives guidance. Solution on health plans, if child is not a "qualified child" under new 152, is to have them qualify as a "qualified relative" under new 152, and 105, as amended, and 106, by regulation (as noticed in 2004-79), softens the definition of "qualified relative" by not imposing the gross income test. Thus, if a parent supplies at least 1/2 support for a child, child can qualify as a "qualified relative" for health plan purposes, so no adverse tax consequences under health plans.

[g8r]

Agreed.

But the trick is how to move the child from a "qualified child" to a "qualified relative." By definition, if the child is a "qualified child" (which is based on residency, not support), then the child can't be a "qualified relative."

[Guest eafredel]

One of the requirements for being a "qualifying child" is that the child must not have provided over one-half of his or her own support for the year.

The "qualifying relative" alternative helps out if the health plan's standards for coverage for dependents are broader than those in the new law, especially for childdren over age 18 and students over age 23.

[Guest kegeiger]

Another issue is children who are enrolled through a QMSCO. In many cases, the parent does not provide any support or minimal support and/or there is no divorce involved. Accordingly, the child may not count as a qualifying child or qualifying relative, but the plan has no choice but to enroll the child because of the order.

[Guest jigpsu100]

If the new definition is applicable and a Welfare Benefit Plan defines the definition of dependent, does the plan have to be amended by 12/31/04. If so, I'd like to get started now so I'm not here until midnight on the 31st.