Starting in 2010, a new Wisconsin law requires group health insurers to provide coverage for adult children of insured employees if all of the following conditions apply:
The child must be over age 17, under 27, and unmarried, and
If the child’s employer offers group coverage, either the child must not be eligible, or the premium for that plan (if any) must exceed the premium for his or her coverage as a dependent under the parent’s group health care plan.
The value of the coverage could be taxable to the parent
These conditions may include some adult children who do not qualify as dependents for health coverage purposes. When that happens and a parent requests coverage, the value will be taxable to the parent for both federal and state income tax purposes. The parent’s employer will have to treat it as taxable wages and report it as such on Form W-2. The Wisconsin Department of Revenue states that employers and insurance providers will determine the value.
Which children may be eligible for coverage but not qualify as dependents for health purposes? Those who both:
Are too old to qualify as children (such as students 24 or older and non-students from 19 to 26), and
Furnish at least half of their support.
If you are an employer, please be aware of the following:
A child may qualify as a dependent for health coverage up to age 27 if the parent furnishes more than half of the child’s support for the calendar year. In such a case, the value of the coverage will not be taxable to the parent.
It may not be possible to know at the beginning of the year whether a parent will furnish more than half of a child’s support for the entire calendar year. You may want to wait until this information is available before you impute wages. There are no federal or Wisconsin guidelines on when to impute wages under these circumstances. If you erroneously impute wages at the beginning of the year, it may be awkward to make corrections later on.
It is possible that federal health reform legislation will change to incorporate the “up to age 27 rule” that this new Wisconsin law uses for health care coverage. As we go to press, this has not yet happened. If it does, the adverse income tax implications discussed in this article would presumably disappear on the federal law’s effective date. We’ll keep you posted.
Please contact us if you have any questions.
James Derzon, CPA, is the employee benefits specialist for our firm on technical matters pertaining to retirement plans and employee benefits. Jim works in these areas with our clients, large and small. He has extensive experience in both industry and public accounting.