The definition of "dependent" under Section 105 of the Internal Revenue Code has been expanded to cover adult children who are under the age of 27 for the entire taxable year. The change was effective on March 30, 2010. Employers who provide group health plan coverage to dependents who previously did not meet the Federal tax code's definition of "dependent" will no longer need to after-tax premiums or tax amounts paid by the employer toward the dependent premiums, for those dependents who are under age 27 and remain under age 27 for the entire taxable year. A child who turns age 27 during the plan year would not meet the new federal definition of "dependent" because he/she did not remain under 27 for the entire taxable year. In practice, employees with adult children covered under the health plan will not have any additional Federal tax consequences until the plan year after the year in which the child turned 26. For the plan year during which the adult child turns age 27, the adult child will be a non-tax dependent and the value of his/her coverage must be paid on an after-tax basis and any employer contribution toward the adult child's coverage considered taxable income to the employee.
This should be a welcomed change for Iowa employers who have had to wrestle with the tax implications of Iowa's dependent mandate. Please note, however, that Iowa still requires group health plans to offer coverage for dependents who are full time students regardless of age. Therefore, employees may still have dependent children who qualify for coverage but do not meet the Federal tax code's expanded definition of dependent. Employers would need to continue after-taxing the premiums associated with these dependents as well as taxing contributions made by the employers toward the dependents' coverage.
For more information, contact Susan Freed at 515.288.2500.