In March 2010, President Obama signed the Patient Protection and Affordable Care Act into law. This new Act requires that health plans and insurers who offer coverage to children on their parents’ plan make the coverage available until the child reaches age 26. This law applies to married and non-married children, even if they are no longer a dependent for tax purposes. However, it does not apply to spouses or grandchildren. The Act also amended federal tax laws to exclude the value of any employer-provided health coverage for an employee’s child from the employee’s income through the end of the taxable year in which the child turns 26.
Before this law was enacted, many plans and insurers could remove adult children from their parents’ health care policies because of their age. This left many college graduates or children who moved away from their parents’ home without coverage. As a result, approximately 30% of young adults between the ages of 19 and 25 were uninsured. According to the U.S. Department of Health and Human Services, this rate represented more than one in five of the total uninsured. This was higher than any other age group.
The Act went into effect last fall. Although California had extended health care coverage to adult children up to age 26 in accordance with the new federal law, California failed to amend its tax laws to conform with the federal law regarding the taxable treatment of the coverage. Consequently, while parents were able to exclude the value of the health insurance from their income under federal law, the value of such coverage still qualified as taxable income to parents under California law.
However, on April 7, 2011, Governor Jerry Brown signed Assembly Bill 36. This conforms California tax law with federal law regarding the taxable treatment of health care coverage for adult children. Thus, under both federal and California law, parents may now exclude the value of this coverage from their gross income. AB 36 is effective immediately and is retroactive to September 23, 2010, the day the Act went into effect.
Because this year’s deadline to file federal and state tax returns is April 18, 2011, employers have already distributed W-2 Forms to their employees for 2010. These include in wages the value of adult children health coverage. Thus, employers should consult with their tax advisors and be prepared to handle requests from employees for a corrected Form W-2 adjusting their taxable wages to exclude the value of this coverage. Employees will need the amended form to file an amended tax return.