Older Children on Your Health Plan New Rules & the IRS
Effective January 1, 2009, employees will have the opportunity to obtain medical insurance for their children up to age 25. The increase in the limiting age for children from 23 to 25 is facilitated by ESSSB 5930, which was adopted during the 2007 Legislative Session, amending RCW 41.05, 48.20, 48.21, 48.44, and 48.46. The increase in limiting age does not appear to apply to stand-alone dental or vision coverage.
The law creates issues related to the cost of medical insurance coverage because it allows for a different contribution arrangement for children over age 23. The law also creates tax issues because some of the children eligible for this extended coverage do not qualify as your dependents under the Internal Revenue Code (“IRC”).
Contribution Issues
While this new Washington law extends the limiting age for children from 23 to 25, it does not require employers to pay for the cost of the coverage. Each employer may pass along the full cost of the premiums to the employee for children over age 23 if they wish. However, you are not required to do so.
Tax Issues
Even though the new Washington law provides older children access to medical insurance coverage, it is important for employees and employers to understand the tax implications relating to the cost of the coverage. Employers can provide medical insurance coverage for employees’ children tax-free only if the children qualify as the employees’ dependents under the IRC. If the children do not qualify, the employee must be taxed on the cost or value of the medical insurance coverage provided to such children, minus any after-tax contributions made by the employee for the coverage.
Example:
Employee A elects coverage for his Child B, who is age 24. Child B does not pass one of the three tests on the Checklist for Tax-Free Employer Medical Insurance Coverage (pdf, 30 kb) to qualify as Employee A’s dependent under the IRC.
The cost of dependent coverage for Employer C’s medical insurance plan is $300 per month per dependent. Employer C contributes $200 towards the cost of coverage. Employee A pays for the remaining cost of coverage, $100.
In this example, Employer C must add $200 per month to Employee A’s taxable income (and withhold federal income and employment taxes from Employee A’s salary relating to this imputed income). Employee A pays his share of the contribution, $100 per month, with after-tax dollars.
In other words, the total annual cost, or value, of coverage in our example, is $3,600: Employee A pays for $1,200 of the cost with after-tax dollars and has $2,400 added to his or her taxable income for the year. However, the actual benefits paid under the medical insurance coverage (by Regence BlueShield, Asuris Northwest Health, or Group Health) are not taxable to Employee A or Child B.
Important Note:
When two dependents are already covered, and another dependent(s) (age 23-25) is added that does not meet the test criteria, please calculate premium by counting your oldest dependent as the "first dependent" rate premium. Your second oldest dependent would be calculated as the "second dependent" rate premium, and any others would not have taxable premium associated with coverage.
We encourage each employer to use the attached Checklist for Tax-Free Employer Medical Insurance Coverage for every employee that has a child over 23 that they wish to cover on their medical insurance. Please attach this completed form to AWC Combined Insurance Enrollment Forms for all employees adding children aged 23 to 24 at Open Enrollment.
As always, if you have any questions, feel free to contact Trust staff at 1-800-562-8981 or contact Beverly Lakey via email at beverlyl@awcnet.org.
7/9/08