Dependent coverage extended until age 26
A provision of the health care reform law requires group health plans to extend eligibility for child dependents until they turn 26, whether or not they're in school. The provision applies to commercial (non-Medicare) coverage—other than retiree plans—if that coverage covers child dependents and became effective on or after September 23, 2010. To help prevent graduating students and others from experiencing a gap in coverage, Kaiser Permanente implemented part of this provision early:
- For individual plans—effective April 30, 2010
- For small and large groups—effective May 31, 2010 (except for large groups who chose to opt out of early implementation)
- For labor and trust accounts—early implementation didn’t apply to these groups unless they informed their account manager that they wanted to participate
For all coverage, all of the requirements of the provision will become effective with the first plan year that began on or after September 23, 2010.
Tax implications for employer-provided coverage in California
In California, any employer-provided dependent coverage for adult children who don’t meet the state’s requirements for nontaxable dependent medical coverage will be considered taxable income to the employee for state income tax purposes. This means you may want to:
- Notify your employees that the value of dependent medical coverage for adult children may need to be reflected on their year-end W-2 form as imputed state taxable income
- Provide some information on the state tax requirements for nontaxable coverage
- Request reporting from employees on covered adult children who don’t meet state requirements for nontaxable dependent coverage
- Perform separate reporting of state imputed income and additional payroll withholding for state income taxes for the value of dependent coverage of an employee’s adult children who are not eligible for state tax-free coverage
This requirement applies to self-insured and fully insured group coverage for employees who are subject to California state tax reporting and withholding.
Tax implications for employees with HSAs
HSA disbursements for an employee’s children’s medical expenses are exempt from federal income tax only if the child meets a narrower IRS definition of a dependent. Disbursements for children who don’t meet this stricter definition may be considered non-qualified expenses, which are subject to tax and penalties. Also, in 2011, the penalty for non-qualified expenses increased from 10 percent to 20 percent of the disbursement amount.
What this means for you and your group
- Make sure you’re aware of the tax implications for employees with HSAs and adult child dependents
- These tax issues aren’t specific to Kaiser Permanente, and they don’t impact how we’re implementing dependent coverage of children until they turn 26
- For more information about the federal tax treatment of employer-provided coverage and HSAs, visit irs.gov* or consult your legal counsel or tax advisor
- For any other questions, contact your broker or Kaiser Permanente representative.