Plan Dependent vs. Tax Law Dependent

[rocknrolls2]

An employer maintains a cafeteria plan for its employees which provides a number of benefits including medical coverage offering a number of different options. Most of the coverage is provided on a self-funded basis with the exception of the HMOs, which are considered insured. The plan defines the term dependent as including any child of the participant up to age 19 or any child of the participant up to age 23 provided that s/he is a full-time student at a post-secondary institution. Someof the HMOs having a service area in certain states have a state insurance law provision which either defines the term dependent child as an individual who is older than the term defined in the plan document.

(1) Can the employer impute the employer portion of the cost of covering a child whose age exceeds that contained in the plan definition of dependent into the employee's income and treat the employee's payment of his/her portion of the cost of coverring such child as made on an after-tax basis without either (a) determining whether the child qualifies as a dependent of the employee under federal tax law; or (b) offering the employee the opportunity to prove that the child qualifies as a dependent under federal tax law? (This is particularly relevant in MA which provides for a 2-year continuation period for a child losing dependent status under Section 106 of the Code).

(2) Let's assume that, regardless of the answer in (1), the employer is conducting a dependent audit to determine whether the claimed dependents are in fact eligible. If the employer uncovers a child who falls outside the plan definition and the employee is forced to offer proof that the child is eligible to be covered under a state law mandate, which proof also determines whether the child is a federal tax dependent, if the employer determines that the child is a federal tax law dependent, must the employer treat the dependent as a federal tax dependent in spite of the plan's definition of dependent?

[J Simmons]

(1) I don't know how the employer would meet its duty to properly report taxable income on a Form W-2 if the employer does not determine if the dependent is a federal tax dependent. If the employer simply imputed the income in order to avoid making the determination, wouldn't that be improperly overreporting taxable income on the Form W-2?

(2) I think that answer to #(1) answers this too. Can an employer simply overstate taxable income to the employee on Form W-2 in order to avoid having to make that determination?

Federal law does not require that health coverage be provided to employees or their dependents. If it is provided, then it is not taxable income to the employee to the extent of the cost of coverage for the employee and federal tax dependents. To the extent that the cost of coverage is for any other dependent--per the plan definition or mandated state law definition--it is taxable income to the employee.