CALIFORNIA: Health coverage of adult children subject to state income tax
Although last year’s health care reform law made coverage available to employees’ adult children up to age 26, and provided a federal income tax exclusion for the coverage, California employers should be aware that California’s tax law does not provide such an exclusion from income for adult child coverage. If passed by the California legislature, AB 36 would change that by providing an income tax exclusion that parallels federal law. However, unless and until that bill is passed, employers must add the value of the coverage for children from the ages of 19 through 25 to the employee’s gross income for state payroll tax purposes. The amount would be the difference between the insurance premiums paid to cover the adult child and the amount that would have been paid had the adult child not been covered.
Here’s an example: The employee covers himself, his spouse and his adult child, for a family premium of $1000. If he did not cover his adult child, the employee plus spouse rate under this employer’s plan would be $750. In this example, the adult child’s coverage creates $250 in taxable income for the employee under California law. In some cases the value of the coverage could be equal to zero. For example: the employee covers herself, her spouse and her three children, including one adult child, for a family rate of $1000. If she did not cover her adult child, the family rate would still apply to cover her spouse and the remaining two children. In this example, there is no taxable income attributable to the adult child’s coverage because it cost the employee nothing to cover the adult child. Questions? Contact your tax adviser.