Health Care Tax Law - UPDATE

(March 8, 2011) A California Chamber of Commerce-supported bill to remove the state tax on health care coverage for certain adult children has passed the Assembly.

The bill, AB 36 (Perea; D-Fresno), conforms California with federal law regarding the taxable status of health care coverage for an adult child up to the age of 26, as well as payments or reimbursements made by an employer for an employee’s adult child.

The federal Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, both passed in March 2010, allowed children up to the age of 26 to remain on their parents’ health care plans.

The federal government also amended the Internal Revenue Code to reflect that the value of the coverage provided for these adult children as well as any payments/reimbursements made by the employer for the medical expenses of such children is not taxable income to the parent.

Last year, California legislation expanded medical coverage to dependents up to the age of 26 in order to match the federal health care law. The state law, however, did not adopt the federal tax rules for adult child medical coverage or medical payments.

Current Exclusions
As a result, the fair market value of medical coverage provided to adult children from 19 to 25 years of age is now taxable income in California, except if other exclusions that existed in the law before the adoption of the state law apply. The exceptions are:

• The child is (a) under the age of 24; (b) a full-time student in the calendar year; (c) maintains the same principal residence as the parent for at least half of the year; and (d) receives more than one-half of his/her annual financial support from the parent; or
•The child is permanently and totally disabled, regardless of age.
Due to this glitch in the law, businesses and employees in California are faced with the administrative, and financial burden of determining the fair market value of the insurance coverage or medical payments provided solely for the adult child in order to properly calculate the state taxes owed.

Conformity
AB 36 seeks to resolve this discrepancy between California and federal tax law, thereby relieving California businesses and employees from this unnecessary cost. Conforming to federal law and treating the value of the adult health care coverage as non-taxable income would be an income tax reduction for employees, and a payroll tax reduction for employers.

AB 36 passed the Assembly on a vote of 74-0 on March 3. It now awaits assignment to a policy committee in the Senate.