OverAge Dependent - Imputed Income at State Level

[Christine Roberts]

Many states do not conform to PPACA/HCERA and Notice 2010-38 regarding federal tax exclusion of value of coverage provided to over age dependents (up to age 26 regardless of student status, etc.).

In determining imputed income at the state level resulting from such coverage, what of the instance of an employee who is already paying the maximum family coverage premium? Addition of a minor dependent would not increase his or her premium, so can there really be said to be imputed income at the state level? And for the employee whose overage dependent causes coverage to increase from, say, self-plus-one to family coverage, is the imputed income equal to the difference between the old and new premium amounts?

I would be interested in others' comments as we head into Form W-2 season.

Thank you.

[GMK]

Even if it doesn't increase the premium (already paying family premiums), the cost of the added coverage is imputed income for state purposes. That cost is not specifically defined. It may be the single coverage premium or a selected cost differential or a cost determined by the coverage provider's actuaries or maybe something else. Whatever you use, apply it consistently. Sorry, don't have references off hand.

We are dealing with this (in a coverage-to-age-27 state), and it's extra administrative overhead and fairly costly to employees. But the state is determined to generate revenue.

[Peter Gulia]

Christine, I haven’t looked State-by-State, but I happen to know Minnesota’s announcement.

Minnesota’s Department of Revenue announced that, at least for wages paid before January 4, 2011, the Department won’t enforce Minnesota law that requires income tax withholding from wages to the extent of the portion of an employee’s wages that results from providing health coverage regarding a child who is not the employee’s dependent and is excluded from income for Federal income tax purposes. The period of this non-enforcement is ambiguous because the Department announced that it will not require this withholding “until the Minnesota legislature has had the opportunity to fully [sic] address adoption of the provisions contained in the [Federal law].” The announcement does not state what facts would lead the Department of Revenue to find that the legislature had a sufficient “opportunity”.

Minnesota’s Department of Revenue did not announce a non-enforcement policy for reporting (rather than withholding from) wages. But the announcement suggests that the Department might have assumed such a policy:

Since employees will be required to include those federally exempt benefits as income on their 2010 Minnesota income tax returns unless Minnesota law is changed, the Department of Revenue encourages employers to share this information with affected employees so the employees can decide whether to elect additional withholding if they are concerned about being sufficiently withheld. Employees can elect additional Minnesota withholding by completing Form W-4MN, Minnesota Employee Withholding Allowances/Exemption Certificate.

The non-enforcement policy permits an employer to count Minnesota income tax withholding by applying Minnesota tax rates to Federal income tax wages. But because this is not required, a careful employer should explain to its employees what method the employer uses.

In counting the Federal income tax wages of an employee whose child was covered under a health plan, the coverage of the child might be partly included and partly excluded. For example, if a child was not a dependent at any time in 2010 but was covered throughout 2010, an employer might treat 75% (9/12) of the year’s value of the child’s coverage as excluded from the employee’s Federal income tax wages, and might treat 25% (the portion of the year before the IRC § 105(b) exclusion began on March 30, 2010) as included. Or counting days might treat 75.89% (277/365) as excluded.

If some of a child’s coverage is included in the employee’s income, that is measured by the “fair market value” of the coverage for the included period. The fact that the presence or absence of the child from the employee’s family coverage happens not to change the contribution required of the employee doesn’t by itself change the “fair market value” of the coverage.

[Christine Roberts]

Even if it doesn't increase the premium (already paying family premiums), the cost of the added coverage is imputed income for state purposes. That cost is not specifically defined. It may be the single coverage premium or a selected cost differential or a cost determined by the coverage provider's actuaries or maybe something else. Whatever you use, apply it consistently. Sorry, don't have references off hand.

We are dealing with this (in a coverage-to-age-27 state), and it's extra administrative overhead and fairly costly to employees. But the state is determined to generate revenue.

Thanks for the replies. It is an administrative nightmare. In Minnesota - if the legislature does not end up tracking federal law, won't the employers that took the relief offered have under-withheld for state income tax purposes? Will the state allow a penalty-free catch up?

[GMK]

Minnesota’s Department of Revenue announced that, at least for wages paid before January 4, 2011, the Department won’t enforce Minnesota law that requires income tax withholding from wages to the extent of the portion of an employee’s wages that results from providing health coverage regarding a child who is not the employee’s dependent and is excluded from income for Federal income tax purposes.

That's good information (as usual), Peter.

Makes me wonder, though, ...

did they also announce that, to the extent one's underwithholding results from the state's not enforcing withholding on the imputed income for overage dependent coverage, they would waive the interest on and/or penalty for the underwithholding?

I'm guessing not, because of their suggestion that employees may wish to increase withholding. Looks like a revenue generating gotcha to me, but I'm in a grumpy mood about this whole issue.

[MARYMM]

Many states do not conform to PPACA/HCERA and Notice 2010-38 regarding federal tax exclusion of value of coverage provided to over age dependents (up to age 26 regardless of student status, etc.).

In determining imputed income at the state level resulting from such coverage, what of the instance of an employee who is already paying the maximum family coverage premium? Addition of a minor dependent would not increase his or her premium, so can there really be said to be imputed income at the state level? And for the employee whose overage dependent causes coverage to increase from, say, self-plus-one to family coverage, is the imputed income equal to the difference between the old and new premium amounts?

I would be interested in others' comments as we head into Form W-2 season.

Thank you.

CT mandated overage dependent (OA Dep) coverage a couple of years ago.

Based on our research at that time and what our state govt was doing with their employees (it was posted on the State Comptroller website under State Employee Benefits) and advice from counsel, we imputed taxable income for the single premium coverage cost for EACH overage dependent. This was done regardless of any change or lack thereof in contributions charged to the employee.

For example, Joe Schmoe has family coverage for wife and the 3 Schmoe offspring. He pays $100 per pay period for this coverage thru a Sec 125 Plan. Joe Schmoe Jr. was an OA Dependent according to Federal guidelines at the time. Our single premium rate was $400 per month. We imputed $400 of taxable income to Joe each month for the value of the coverage for Joe Jr. Joe Sr's Sec 125 Plan contributions did not change. If he had 2 OA Dep kids, we imputed $800 of taxable income each month.

As you can imagine, our employees were quite happy with "Obamacare" when we told them we no longer had to tax them (Federal and State since CT follows Federal) on that coverage.

Another option that we discussed was to use the single COBRA premium as the basis for the imputed income since it could be argued that is Fair Market Value - what the coverage would have cost each OA dependent if they had to elect it thru COBRA.