working families tax relief act -- definition of dependent

[Guest dbiowa]

The recent act amended the master definition of "dependent" under Code section 152 effective as of the 2005 taxable year. Among other changes, the new definition imposes an age cap on dependent children (to be a dependent, the child must be 18 or under, or 23 or under if a student).

In connection with this change, I read Codes sections 125 -- the cafeteria plan rules -- and 105 -- tax exempt health plan payments -- to say that as of next year, you cannot run premiums for a full-time student over the age of 23 pre-tax through a cafeteria plan.

I hope I'm just missing something.

If premiums can't be taken pre-tax, then either many plans should be changed for open enrollment, or we'll have to inform employees that they'll be hit with post-tax premiums next year if they cover an older college/post-grad student.

Any thoughts?

[g8r]

I don't have my markup the law with me. But, you may want to look at the definition of "qualifying dependent." If someone is not a "qualifying child" (e.g., b/c of the age limit), the person might still be a "qualifying dependent" if those requirements are met (and the compensation threshold to be a qualifying dependents does not apply to IRC 105).

[sloble@crowleyfleck.com]

g8r: are the new regs out on this?

[g8r]

No, there aren't any regs out on this.

[Guest eafredel]

There is a flurry of activity on this score, but I am not sure any of it reaches the issue that was originally raised (and which I think has some significant impact). First, the definitions involved are the definition of a "qualifying child" and a "qualifying relative." The IRS recently issues Notice 2004-79 which states that regulations will be issued to provide an exclusion from gross income under Section 106 of the Code for an individual who is not a "qualifying child" but who is a "qualifying relative" without regard to the income limitations. Also, there are some pending technical corrections to the Working Families Tax Relief Act.

I have clients who provide health coverage for children until age 22 and for full-time students until age 25. It does not look to me like any of these changes fix their problem, but I am still studying the legislation.