Update on State Conformity with Federal Tax Treatment of Health Benefits for Children under Age 27

The Patient Protection and Affordable Care Act (P.L. 111-148), amended Code Sec. 106, effective for the first plan year beginning on or after Sept. 23, 2010, to provide an exclusion from an employee's gross income for contributions that an employer makes to an accident or health plan that provides for health care coverage for the employee's child (as defined in Code Sec. 152(f)(1)) through the end of the taxable year in which the child turns age 26. In addition, the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) amended Code Sec. 105(b), effective March 30, 2010, to extend the general exclusion from gross income for medical care reimbursements under an employer-provided accident or health plan to include reimbursements for an employee's child who has not attained age 27 as of the end of the tax year. Prior to the above legislation, an employee wouldn't have received these benefits unless the child was the employee's dependent.

Some states conform to the current version of the Internal Revenue Code (e.g., Colorado, Connecticut, Delaware, District of Columbia, Idaho, Illinois, Kansas, Louisiana, Maine, Michigan, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, Utah, West Virginia, and Vermont), while others do not. Here is a brief rundown of the latest information we have on whether a state that doesn't conform to the current version of the Internal Revenue Code (IRC) has adopted the federal rules.

• A spokesperson for the Alabama Department of Revenue has communicated that while Alabama conforms to the federal tax treatment of medical care reimbursements under Code Sec. 105(b), it does not recognize Code Sec. 106, which allows employer-provided accident or health insurance benefits to be excluded from an employee's gross income.

• Arizona enacted legislation in 2011 to conform to a version of the IRC that includes the above federal provisions. The conformity is retroactive to the federal effective dates notes above (see L. 2011, H2008 (c. 4)).

• Arkansas has not yet adopted the federal provisions. The Arkansas General Assembly is currently in session for the first time since the federal legislation was enacted.

• California has announced that it does not conform to the federal provision that excludes the value of employer-provided health insurance premium payments for an employee's nondependent adult child under the age of 27 from gross income. As a result, the reporting of the insurance premium wage amount on Form W-2 will be different for California and federal tax purposes (see FTB Tax News Alert, 1/24/11, and EDD Tax Branch News #122, 1/24/11).

• Hawaii conforms to certain IRC sections as of April 1, 2010, but not to the federal health benefits legislation noted above (see L. 2009, H2594).

• Iowa has announced that it is conforming to the federal provision that allows the value of employer-provided health insurance coverage for an employee's child to be excluded from the employee's gross income through the end of the taxable year in which the child turns age 26 (see Iowa Department of Revenue Notice, Health Care Coverage for Nonqualified Dependents, 12/23/10).

• Kentucky has not adopted the above federal provisions. It is advising employers, effective Jan. 1, 2011, to treat the amount of health insurance paid for adult children as being paid with post-tax dollars for Kentucky income tax purposes if the amount paid for those adult children would not be eligible for the gross income exclusion under the IRC in effect on Dec. 31, 2006. There will be differences between federal and Kentucky wages on Form W-2 (see DOR 2010 Employer Health Insurance Notice, 12/27/10).

• A spokesperson for the Comptroller of Maryland has communicated that Maryland has adopted the above federal provisions, effective Jan. 1, 2011.

• A spokesperson for the Massachusetts Department of Revenue has communicated that the value of health insurance coverage for an employee's child under 27 years of age is now generally tax-free to the employee if the coverage was provided under a Code Sec. 125 cafeteria plan.

• Minnesota has not yet adopted the federal legislation. There will be differences between federal and Minnesota wages on Form W-2 (see DOR December 2010 Withholding Tax Announcements, 12/1/10). The 2011 Minnesota legislature may elect to adopt the federal provisions retroactively.

• A spokesperson for the Mississippi Department of Revenue has communicated that Mississippi conforms to the new federal rules.

• Ohio follows the federal rules and extends the exclusion to children who are 28 years old.

• Oregon has not yet adopted the federal legislation. There will be differences between federal and Oregon wages on Form W-2 (see Oregon DOR News Release, 12/2010). The 2011 Oregon legislature may elect to adopt the federal provisions retroactively.

• A spokesperson for the Pennsylvania Department of Revenue has communicated that health benefits and contributions for an adult child under the age of 27 are excluded from Pennsylvania gross income if provided under a Code Sec. 125 cafeteria plan.

• South Carolina conforms to a version of the IRC that was in effect prior to the federal legislation. A spokesperson for the South Carolina Department of Revenue has communicated that until the state legislature addresses the federal legislation, South Carolina employers are required to add back the income that was excluded under the new federal law.

• A spokesperson for the Virginia Department of Taxation has communicated that the state will follow the federal rules until the matter has been addressed by the Virginia General Assembly.

• Wisconsin has not adopted the federal legislation. There will be differences between federal and Wisconsin wages on Form W-2 (see Wisconsin News for Tax Practitioners 08/03/2010, 08/03/2010).