The Affordable Care Act and Dependent Children: Coverage and Taxes

Transcription

1 The Affordable Care Act and Dependent Children: Coverage and Taxes Federal Regulations may not be congruent with current State Regulations What employers need to know

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3 3 Patrick C. Haynes, Jr. Today s presenter As counsel for Crawford Advisors Employee Benefits and Executive Compensation Group, Mr. Haynes advises employers and plan sponsors in a variety of health and welfare benefit plan compliance matters, including, but not limited to, tax qualification and other Internal Revenue Code issues, ERISA, COBRA and HIPAA portability and privacy issues. Mr. Haynes lectures frequently and has published many articles on health and welfare benefit plan compliance topics. Practice Areas Employee Benefits & Exec Comp, ERISA, COBRA, HIPAA, 125, and 105, 106, 129, 132 Education Temple University School of Law, LL.M. Rutgers University School of Law, J.D. Rutgers University School of Business, M.B.A. Rutgers University College of Arts & Sciences, B.A. Admitted to Practice U.S. Supreme Court Federal and State Courts of New Jersey Pennsylvania Connecticut District of Columbia

4 4 Agenda Affordable Care Act and Dependents: Details State Issues Table of State Laws State Examples HSA Loophole Fix Pending? Next Steps? Questions?

5 5 Affordable Care Act: Details Effective date of coverage -Sept. 23, 2010 Requires group and individual health insurance plans to extend coverage for dependents until their 26 th birthday Prohibits a plan from denying or restricting coverage for a child who has not yet reached age 26 based on the following: Financial dependency Residency with participant Student status Employment Marital status Any combination of these factors

6 6 Why These Changes? 30% of young adults are uninsured, a higher percentage than any other age group. Young adults have lowest rate of access to employer-based insurance. One in six young adults has a chronic illness like cancer, diabetes or asthma. Nearly half of them report problems paying medical bills.

7 7 What happens to those with a pre-existing condition who join a parent s insurance plan? May face a pre-existing condition exclusion of up to 12 months if they were uninsured for 63 days or more prior to gaining coverage. Starting in 2014 pre-existing condition exclusions will no longer be permitted in either employersponsored or individually purchased health plans.

8 8 How Much Will This Cost? According to the Department of Health and Human Services: Young adults gaining dependent coverage under the new law cannot be charged more than similar individuals who did not lose coverage due to the end of their dependent status. Newly qualified dependents must be offered the same benefits package as similar individuals who were already covered. The value of employer-provided health coverage for this extension of dependent coverage should be excluded from an employee s taxable income.

9 9 Imputed Income correct method* EE: Bob Election: Family - wife, 4 children (one child, David is 23 and has just graduated college and is now working). Pre-Tax Election Family Impute Income (for David) Single COBRA rate minus 2% Per IRS (Notice *)stop this as of 4/1/10 EE: Sally Election: EE + Domestic Partner Pre-Tax Election EE + Domestic Partner (EE-Spouse Tier) Impute Income (for DP) Single COBRA rate minus 2% Both are covering One non Sect. 152 Dep. & Both are being charged the value of the benefit they received. The EE cost and the ER cost for the coverage. *See Question and Answer number three in the American Bar Association, Section of Taxation, May Meeting 2009, Committee on Employee Benefits, Joint Committee on Employee Benefits meeting with the Internal Revenue Service, document, May 7-9,

10 10 Impute Income For? Employees, Opposite Sex Married Spouses & IRS Tax Dependents As of 4/1/2010 Dependents Expanded All Covered Enrolled Participants Domestic Partners & Their Children Grandchildren

11 11 How State Tax Codes May Clash With New Regulations States may continue to apply state law requirements except to the extent that the requirements prevent the application of the Affordable Care Act requirements. In those states that have tax codes that automatically conform to the most current version of the federal Code, the individual s adjusted gross income generally will be the same for both federal and state tax purposes. However, if a group health plan covers employees in a non-conforming state with children who meet the federal, but not state, definition of an eligible dependent, the coverage is potentially taxable to the employees for state income tax purposes. In some states, that does not matter, but in several states it does.

12 12 There is considerable variation among state laws in terms of eligibility requirements. At least 30 states have extended dependent coverage, regardless of student status. Most states require that a young adult be unmarried and financially dependent on their parents in order to qualify for extended dependent coverage. The following table shows an example of a few state laws.

13 Table of State Laws 13

14 14 Non-Conforming States Arizona Arkansas California Georgia Hawaii Idaho Indiana Iowa Kentucky Maine Massachusetts Minnesota Oregon South Carolina Virginia West Virginia Wisconsin

15 15 As of February 25, 2011 only seven of non-conforming states had directly addressed, in whole or in part, the state tax treatment issue: California Iowa Kentucky Minnesota Oregon Virginia Wisconsin However, in many of these states the information provided contains a caution that the state may revise the treatment retroactively.

16 16 For Example, California The provision of health coverage to a child who is not a dependent as defined in the Jan 1, 2010 federal Code will result in taxable income to the employee for state tax purposes. This income must be reported as additional wages on the employee s W-2. The state Franchise Tax Board has issued guidance stating that the amount of income to be included is equal to the amount by which the fair market value of the coverage provided to the nondependent child exceeds the amount that the employee paid for the coverage CA has legislation pending that will change its tax rules to conform with the new federal treatment retroactive to March 20, Legislation has made some progress in committee, but its fate is far from certain as California grapples with major initiative to reduce its budget deficit.

17 17 Virginia On February 16, 2011 Virginia s governor signed HB 1874, which amends the Virginia tax code to follow the federal Code and other federal tax laws as they existed on December 31, The prior reference was to January 22 nd, Minnesota The Minnesota Department of Revenue issued guidance stating that although under current state law the fair market value of nondependent child health coverage would constitute wages to the employee, the Department would not require employers to withhold taxes with respect to these benefits until the state legislature addresses the issue. In January 2011, a bill providing for retroactive amendment of the state law to conform to federal law was introduced

18 18 What Should Employers Do? Imputed state income tax may still apply depending upon whether or not your state conforms to federal law automatically or if the state must separately pass legislation. ERs in nonconforming states face great uncertainty due to lack of legislative clarity. What amount should ERs withhold and what amount should ERs report as wages/earnings? ERs should consult with their payroll administrators and state tax advisors as to whether the state tax treatment has changed and whether there is additional state guidance on imputed income and withholding.

19 19 HSA Health Savings Account Exist under Internal Revenue Code (IRC) Section 223 Permits pre-tax deposits to an HSA via a Section 125 Plan Permits participants to make payments for Medical Expenses: as defined by IRC Section 213(d) for any IRC Section 152 tax-dependents. The Affordable Care Act did not amend/alter/expand IRC Section 152 Therefore you can only use your HSA for medical expenses for: Your children up to age 19; and Your children that are full-time students ages The Affordable Care Act increased the penalty ineligible distributions from an HSA from 10% to 20% Conclusion until the loophole is closed: do not use your HSA monies to pay for the medical expenses of these ineligible dependents

20 20 Next Steps? Talk with your broker, consultants and administrators about how to communicate to your employee/plan participants about the tax treatment in these states. Discuss with your payroll provider/vendor how you are imputing income, now for: Domestic Partners Children of Domestic Partners (that aren t your EE s dependents) Overage dependents in a non-conforming state The value of ER-paid life insurance over $50,000 The value of ER-paid spousal insurance over $5,000 The value of ER-paid dependent insurance over $2,000

21 21 Questions Crawford Advisors, LLC 200 International Circle, Suite 4500, Hunt Valley, MD East Lancaster Ave, Suite 640, Radnor, PA Via to: To Download These Slides: