Medicare Part D Subsidy for non-conforming state

[Guest Calimayhew]

California recently adopted a sweeping tax bill that, amongst other things, specifically states that the exclusion from income for the Medicare Part D subsidy (Section 139A of the Internal Revenue Code) shall not apply to California income tax.

Basically, the employer must include the amount of the subsidy for income tax purposes. So, what do you do with a multiemployer VEBA where there is no taxable employer? The subsidy does not really fit the definition of unrelated business income. There might be a preemption argument here, but I thought I'd see if anyone has any thoughts.

Thanks!

[Guest gdburns]

Isn't the participating employee who is taxed?

[Guest Calimayhew]

Isn't the participating employee who is taxed?

Not as I read it.... Section 139A of the Internal Revenue Code states that gross income shall not include any special subsidy payment received under section 1860D-22 of the Soc. Sec. Act. That section of the Act is the subsidy that the plan sponsor receives for sponsoring a qualified retiree prescription drug plan.

What doesn't make sense is that both Oregon and California amended their personal income tax codes, and not their corporate tax codes.

[Don Levit]

It may be possible to set aside this subsidy for the payment of benefits and/or administrative costs, without declaring it as income.

Don Levit

[Guest gdburns]

The Internal Revenue Code and the Social Security Act do not determine the income or other tax imposed by a sovereign state.

There are some states, and probably still 2, that tax Cafeteria Plan salary reductions even though the IRC does not tax it at the Federal level. I do not think that all states have yet allowed HSAs to be tax free, regardless of what is done for Federal Income tax and FICA etc. A running list of Non-conforming states is beng kept by the Moderator of the Forum that fields HSA questions.

As with HSAs and Cafeteria Plans, a sovereign state can and does do what it feels like doing, regardless of Federal Income tax laws etc.

Oregon and California probably did not amend corporate income tax because they could very well have determined that it was not much of an issue in their states. One reason could be that the mumber of employer sponsored plans etc were too few with too few participants. Changing and enforcing the law might cost more than any offsetting savings or benefits.