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CCH® PAYROLL — 05/04/10

IRS issues guidance on health care coverage for children

The IRS has issued guidance on the tax treatment of health care coverage for children under age 27 that provides additional information on the changes made by the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (HCERA) (P.L. 111-152). The guidance may be relied upon pending the issuance of amended regulations by the IRS and the Treasury Department.

Exclusion for employer reimbursements

PPACA generally expanded the Code Sec. 105(b) exclusion from an employee's gross income for employer-provided reimbursements for the medical care of the employee, employee's spouse or employee's dependents to cover employer-provided reimbursements for the medical care of the employee's child who has not attained age 27 as of the end of the tax year. The newly issued guidance clarifies that an employee's child includes a child of the employee who is not the employee's dependent as defined in Code Sec. 152(a). In determining whether the child is not age 27 as of the end of the tax year, the tax year considered is the employee's tax year. Employers may assume that an employee's tax year is the calendar year and may rely upon the employee's representation as to the child's date of birth.

Prior to the enactment of PPACA, the Code Sec. 106 exclusion from an employee's gross income for coverage under an employer-provided accident or health plan paralleled the Code Sec. 105(b) exclusion from an employee's gross income for employer-provided reimbursements for the medical care of the employee, employee's spouse or employee's dependents. Given the changes made to Code Sec. 105(b) by PPACA, the IRS and Treasury intend to amend the regulations under Code Sec. 106 retroactively to March 30, 2010, to provide that coverage for an employee's child under age 27 is also excluded from gross income. Numerous examples, reproduced below, are included in the guidance to illustrate these changes.

Cafeteria plans, FSAs, HRAs

The newly issued guidance clarifies that the exclusion of coverage and reimbursements from an employee's gross income under Code Sec. 105(b) and Code Sec. 106 for an employee's child who has not attained age 27 as of the end of the employee's tax year carries forward automatically to the definition of qualified benefits for cafeteria plans, including health flexible spending accounts (health FSAs). Thus, a benefit will not fail to be a qualified benefit for a cafeteria plan merely because it provides coverage or reimbursements that are excludable under Code Sec. 105(b) and Code Sec. 106 for an employee's child who has not attained age 27 as of the end of the employee's tax year. Since Reg. §1.125-4(c) currently does not permit election changes under a cafeteria plan for children under age 27 who are not the employee's dependents, the IRS and Treasury intend to amend the regulation, effectively retroactively to March 30, 2010, to include change-in-status events affecting nondependent children under age 27. The guidance also clarifies that the same rules that apply to an employee's child under age 27 for purposes of Code Sec. 105(b) and Code Sec. 106 apply to a health reimbursement arrangement (HRA).

FICA, FUTA, RRTA, income tax withholding

Coverage and reimbursements under an employer-provided accident and health plan for employees and their dependents are excluded from wages for Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) purposes and, in a similar manner, for Railroad Retirement Tax Act (RRTA) purposes. Although an employee's child is generally a dependent for these purposes, no age limit applies. Thus, coverage and reimbursements under a plan for employees and their dependents that are provided for an employee's child under age 27 are not wages for FICA or FUTA purposes. Such coverage and reimbursements are also exempt from income tax withholding.

Examples

Example 1. (i) Employer X provides health care coverage for its employees and their spouses and dependents and for any employee's child (as defined in ) Code Sec. 152(f)(1) who has not attained age 26. For the 2010 taxable year, Employer X provides coverage to Employee A and to A's son, C. C will attain age 26 on November 15, 2010. During the 2010 taxable year, C is not a full-time student. C has never worked for Employer X. C is not a dependent of A because prior to the close of the 2010 taxable year C had attained age 19 (and was also not a student who had not attained age 24).

(ii) C is a child of A within the meaning of Code Sec. 152(f)(1). Accordingly, and because C will not attain age 27 during the 2010 taxable year, the health care coverage and reimbursements provided to him under the terms of Employer X's plan are excludible from A's gross income under Code Sec. 106 and Code Sec. 105(b) for the period on and after March 30, 2010 through November 15, 2010 (when C attains age 26 and loses coverage under the terms of the plan).

Example 2. (i) Employer Y provides health care coverage for its employees and their spouses and dependents and for any employee's child (as defined in) Code Sec. 152(f)(1) who has not attained age 27 as of the end of the taxable year. For the 2010 taxable year, Employer Y provides health care coverage to Employee E and to E's son, G. G will not attain age 27 until after the end of the 2010 taxable year. During the 2010 taxable year, G earns $50,000 per year, and does not live with E. G has never worked for Employer Y. G is not eligible for health care coverage from his own employer. G is not a dependent of E because G does not live with E and E does not provide more than one half of his support.

(ii) G is a child of E within the meaning of Code Sec. 152(f)(1). Accordingly, and because G will not attain age 27 during the 2010 taxable year, the health care coverage and reimbursements for G under Employer Y's plan are excludible from E's gross income under Code Sec. 106 and Code Sec. 105(b) for the period on and after March 30, 2010 through the end of the 2010 taxable year.

Example 3. (i) Same facts as Example 2, except that G's employer offers health care coverage, but G has decided not to participate in his employer's plan.

(ii) G is a child of E within the meaning of Code Sec. 152(f)(1). Accordingly, and because G will not attain age 27 during the 2010 taxable year, the health care coverage and reimbursements for G under Employer Y's plan are excludible from E's gross income under Code Sec. 106 and Code Sec. 105(b) for the period on and after March 30, 2010 through the end of the 2010 taxable year.

Example 4. (i) Same facts as Example 3, except that G is married to H, and neither G nor H is a dependent of E. G and H have decided not to participate in the health care coverage offered by G's employer, and Employer Y provides health care coverage to G and H.

(ii) G is a child of E within the meaning of Code Sec. 152(f)(1). Accordingly, and because G will not attain age 27 during the 2010 taxable year, the health care coverage and reimbursements for G under Employer Y's plan are excludible from E's gross income under Code Sec. 106 and Code Sec. 105(b) for the period on and after March 30, 2010 through the end of the 2010 taxable year. The fair market value of the coverage for H is includible in E's gross income for the 2010 taxable year.

Example 5. (i) Employer Z provides health care coverage for its employees and their spouses and dependents. Effective May 1, 2010, Employer Z amends the health plan to provide coverage for any employee's child (as defined in) Code Sec. 152(f)(1) who has not attained age 26. Employer Z provides coverage to Employee F and to F's son, K, for the 2010 taxable year. K will attain age 22 in 2010. During the 2010 taxable year, F provides more than one half of K's support. K lives with F and graduates from college on May 15, 2010 and thereafter is not a student. K has never worked for Employer Z. Prior to K's graduation from college, K is a dependent of F. Following graduation from college, K is no longer a dependent of F.

(ii) For the 2010 taxable year, the health care coverage and reimbursements provided to K under the terms of Employer Z's plan are excludible from F's gross income under Code Sec. 106 and Code Sec. 105(b). For the period through May 15, 2010, the reimbursements and coverage are excludible because K was a dependent of F. For the period on and after March 30, 2010, the coverage is excludible because K is a child of F within the meaning of Code Sec. 152(f)(1) and because K will not attain age 27 during the 2010 taxable year. (Thus, for the period from March 30 through May 15, 2010, there are two bases for the exclusion.) (Notice 2010-38, IR-2010-53, I.R.B. 2010-20, April 27, 2010; IRS News Release IR-2010-53, April 27, 2010.)

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