Instructions For Form Tir 07-16: Personal Income Tax Treatment Of Employer-Provided Health Insurance Coverage For An Employee'S Child

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TIR 07-16: Personal Income Tax Treatment of
Employer-Provided Health Insurance Coverage for
an Employee's Child
Introduction
The Massachusetts Health Care Reform Act at chapter 58 of the Acts of 2006, as amended, changed
chapters 32A, 175, 176A, 176B and 176G of the General Laws to require a broadening of dependent
coverage offered by health insurance carriers. The Legislature made several technical corrections to
the health care reform law in the recent “Act further Regulating Health Care Access,” St. 2007, c. 205,
signed into law on November 29, 2007. Collectively, the amendments require that on or after January
1, 2008, carriers issuing or renewing insured health benefit plans with coverage for dependents make
coverage available for persons “under 26 years of age or for 2 years after the end of the calendar year
in which such persons last qualified as dependents under 26 U.S.C. 106, whichever occurs first.”
[1]
A noncash fringe benefit that is included in gross income is sometimes referred to as “imputed
income.” Under federal income tax law, extending employer-provided health insurance coverage to
an employee’s child up until age 26 may create imputed income for the employee. This TIR provides a
summary of Internal Revenue Service Notice 2004-79, a federal notice that provides relief from
imputed income in many instances where employer-provided health coverage includes an employee’s
grown child. Although this TIR provides general guidance, an employer or an employee seeking a
case-specific determination on federal imputed income must contact the Internal Revenue Service.
The recent legislation provides an exemption for imputed income for Massachusetts personal income
tax purposes where health care coverage is required by Massachusetts law. See G.L. c. 62, § 2(a)(2)
(Q), as added by St. 2007, c. 205, § 6. As a result, Massachusetts will not follow federal law in the
area of imputed income resulting from employer-provided health care fringe benefits.
Federal Income Tax
Section 61(a)(1) of the Code states that, except as otherwise provided, gross income includes
compensation for services, including fees, commissions, fringe benefits, and similar items. A fringe
benefit is any property or service that an employee receives in lieu of or in addition to regular taxable
wages. The extent to which a particular fringe benefit is excluded from gross income depends on the
Code provisions that apply to the benefit. A noncash fringe benefit that is included in gross income is
sometimes referred to as “imputed income.”
Employer-provided health insurance coverage is a fringe benefit. Section 106(a) of the Code provides
that gross income of an employee does not include employer-provided coverage under an accident or
health plan. Section 1.106-1 of the U.S. Treasury Regulations provides:
The gross income of an employee does not include contributions which his employer makes to an
accident or health plan for compensation (through insurance or otherwise) to the employee for
personal injuries or sickness incurred by him, his spouse, or his dependents, as defined in section
152.
Under the definition of dependent at § 152, an individual must be either a “qualifying child” dependent
or a “qualifying relative” dependent. In general, § 152(c) provides that a “qualifying child” is a child
who lives with an employee for more than half a year, who is either under age 19 or is a full-time
student under age 24, and who does not provide over half of his or her own support for the calendar
year.[2]
Section 152(d)(1) provides, in general, that a “qualifying relative” is an individual who bears a
relationship to the taxpayer (including any child of the taxpayer who is not a “qualifying child”,
regardless of the child’s age), whose gross income is less than the exemption amount ($3,400 in
2007), and who receives over one-half of his or her support from the taxpayer. However, for purposes
of the exclusion at § 106 for employer-provided health coverage, an Internal Revenue Service notice
expands the definition of dependent at § 152 to eliminate the gross income limit at § 152(d)(1) for a
qualifying relative.
In Notice 2004-79, 2004-2, C.B. 898, the Internal Revenue Service announced that U.S. Treasury
Regulation § 1.106-1 would be amended effective for taxable years beginning after December 31,

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