Tax Information Relating to Health Care Benefits for Children Under Age 27

​NOTE: This Article Has Been Replaced by a Revised Article Dated November 7, 2011. See the new article...

FEDERAL TREATMENT

For federal income tax purposes, the Patient Protection and Affordable Care Act, Public Law 111-149, and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152, were signed into law by the President on March 23 and 30, 2010, respectively. These two Acts are referred to as the "Affordable Care Act."

Effective March 30, 2010, the Affordable Care Act provides that the exclusion from gross income of an employee for employer-provided accident or health insurance benefits including coverage in a medical flexible spending accounts (FSA) for the employee, the employee's spouse, or the employee's dependents is extended to apply to any child of the employee who, as of the end of the tax year, has not attained the age of 27.

Thus, if the child is age 26 or less at the end of the tax year, the exclusion applies even if the child provides more than one-half of his or her own support, earns more income than the exemption amount, does not live with the taxpayer, or if any other restriction applies which prevents the employee from claiming a dependency exemption.

Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer's plan or are added to the employer's plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child, or eligible foster child.

WISCONSIN TREATMENT

The provisions of the Affordable Care Act do not apply for Wisconsin income tax purposes unless they are adopted by the Wisconsin Legislature.

Until the provisions of the Affordable Care Act are adopted, Wisconsin must follow federal law in effect prior to the Affordable Care Act. Therefore, to qualify for the exclusion from gross income for employer-provided accident or health insurance benefits including coverage in a medical flexible spending account (FSA), for Wisconsin purposes the child under age 27 must qualify as a dependent for income tax purposes (either as a "qualifying child" or "qualifying relative"). For purposes of health insurance coverage only, an adult child may meet the definition of a "qualifying relative" even though the adult child's gross income may equal or exceed the exemption amount.

If the adult child does not qualify as a dependent, the fair market value of the adult child's health insurance coverage and reimbursements from a medical flexible spending account (FSA) are income and taxable wages to the employee:

  • Determination of Fair Market Value of Health Insurance Coverage The fair market value of the adult child's health coverage is determined by the employer and insurance provider. Contact your employer for further information. The Department of Revenue cannot determine the fair market value of the coverage.
  • 2010 Form W-2 Reporting Requirement for the Fair Market Value of Health Insurance Coverage Employers must either (1) include the amount that is taxable for Wisconsin purposes (but not taxable for federal purposes) in Box 16 of the 2010 Form W-2, or (2) provide employees with a supplemental "Wisconsin only" Form W-2 with the taxable benefits shown in Box 16.
  • 2010 Form W-2 Reporting Requirements for Flexible Spending Accounts (FSA) If the adult child does not qualify as a dependent, reimbursements from a medical flexible spending account for medical expenses incurred by the adult child is taxable income for Wisconsin purposes. Employers must either (1) include the amount that is taxable for Wisconsin purposes (but not taxable for federal purposes) in Box 16 of the 2010 Form W-2, or (2) provide employees with a supplemental "Wisconsin only" Form W-2 with the taxable benefits shown in Box 16.
  • Wisconsin Income Tax Return Filing Information Individuals filing 2010 Form 1 or 1NPR must use Wisconsin Schedule I, Adjustments to Convert Federal Adjusted Gross Income and Itemized Deductions to the Amounts Allowable for Wisconsin, to adjust for the difference between the Wisconsin and federal income tax treatment of health care benefits for children under age 27. Individuals filing Form 1A should fill in the adjusted Wisconsin wages on line 1 of Form 1A.

April 14, 2011

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