June 18, 2010
Healthcare Reform: Tax Benefits for Adult Child Coverage
~ written by Char Sutak, Member Benefits, Willis
Under a new tax provision in the Patient Protection and Affordable Care Act the value of any employer-provided health coverage for an employee’s child is excluded from the employee’s income through the end of the taxable year in which the child turns 26. This tax benefit applies regardless of whether the plan is required by law to extend health care coverage to the adult child or the plan voluntarily extends the coverage.
Tax Benefit Continues Beyond Extended Coverage Requirement
While the Affordable Care Act requires health care plans to cover enrollees’ children up to age 26, some employers may decide to continue coverage beyond the child’s 26th birthday. In such cases, the Act provides that the value of the employer-provided health coverage is excluded from the employee’s income for the entire taxable year in which the child turns 26. Because of this, if a child turns 26 in March but stays on the plan through Dec. 31 (the end of most people’s taxable year), all health benefits provided that year are excluded for income tax purposes.
These tax benefits are effective March 30, 2010. The exclusion applies to any coverage that is provided to an adult child from that date through the end of the taxable year in which the child turns 26.
This expanded health care tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
In addition to the exclusion from income of any employer contribution toward qualifying adult child coverage, employees can receive the same tax benefit if they contribute toward the cost of coverage through a cafeteria plan. This benefit is available immediately, even if the cafeteria plan document has not yet been amended to reflect the change. Employers have until the end of 2010 to amend their cafeteria plan documents to incorporate the change.