Instructions For Form Tir 07-16: Personal Income Tax Treatment Of Employer-Provided Health Insurance Coverage For An Employee'S Child (Page 2 of 6) in pdf

2004 to reflect the same definition for the term dependent in § 105(b) as shown below in bold:

105(b) Amounts expended for medical care. Except in the case of amounts attributable to (and

not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for

any prior taxable year, gross income does not include amounts referred to in subsection (a) if

such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for

expenses incurred by him for the medical care (as defined in section 213(d) of the taxpayer, his

spouse, and his dependents (as defined in section 152, determined without regard to

subsections (b)(1), (b)(2), and (d)(1)(B) thereof). Any child to whom section 152(e) applies

shall be treated as a dependent of both parents for purposes of this

subsection.[3]

Accordingly, under Internal Revenue Service Notice 2004-79, an employee may exclude from gross

income the value of employer-provided health insurance coverage for a child who, while not a

“qualifying child,” meets the definition of a “qualifying relative” determined without regard to the child’s

gross income. In effect, many children who do not meet the age requirements of a “qualifying child”

will meet the requirements of a “qualifying relative” where the income limitation of $3,400 (for 2007) is

not applied. For purposes of the exclusion from gross income at § 106 for employer-provided health

insurance coverage, a child of an employee who exceeds the age to be a “qualifying child” is a

"qualifying relative” if the taxpayer provides over half of the child’s support for the calendar year; also,

any child of divorced parents who meets the expanded definition of dependent in connection with one

parent is treated as a dependent of both parents. In such a case, the child is considered a dependent

for purposes of § 106 and there is no federal imputed income charged to the employee.

Valuation of Imputed Income is a Question of Federal Law. As a result of extended employer-provided

health insurance coverage for children “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,” there will be some instances where the benefits provided to an employee include health

insurance for a nondependent child for purposes of IRC § 106 (e.g., a child that is over the age to be a

“qualifying child” and is not a “qualifying relative” because the child provides at least half of his or her

own support). For federal income tax purposes, an employee who opts for coverage for a

nondependent child will be taxed on the fair market value of the child’s coverage to the extent that it

exceeds any amount paid by the employee on an after-tax basis (employee pre-tax contributions are

considered to be employer contributions). Pending specific guidance from the Internal Revenue

Service, an employer must determine the amount of imputed income attributable to the health

insurance coverage of an employee’s nondependent child under valuation principles articulated in

federal income tax law.

MassachusettsPersonal Income Tax.

Effective for taxable years beginning on or after January 1, 2007, General Laws chapter 62,§ 2(a)(2)

(Q) provides that the following item must be deducted from Massachusetts gross income:

If an employee participates in an employer-provided health insurance plan, any amount which,

but for this section, would be included in gross income of the employee by reason of coverage

under the plan of any person other than the employee, to the extent such coverage is mandated

by law.

Massachusetts gross income is federal gross income, as defined under the Code, with certain

modifications. G.L. c. 62, § 2(a). Generally, with respect to the personal income tax, Massachusetts

adopts the Code as amended and in effect on January 1, 2005. G.L. c. 62, § 1. Massachusetts follows

IRC § 106 as amended and in effect of January 1, 2005, whereby employer-provided health and

accident premiums are excluded from the gross income of an employee, as long as the benefits are

for the employee, the spouse or dependents of the employee. Also, Massachusetts adopts IRS Notice

2004-79 which expands the definition of dependent for purposes of the exclusion from gross income

at IRC § 106.

As a result, the value of employer-paid health insurance benefits for a child of an employee who is a

dependent under the federal income tax rules at IRC § 106 is excluded from the employee’s federal

gross income and is likewise excluded from the employee’s Massachusetts gross income. However,

pursuant to G.L. c. 62, § 2(a)(2)(Q), any imputed income resulting from health insurance coverage for

an employee’s child who is not a dependent under IRC § 106 that is included in an employee’s federal

gross income is excluded from Massachusetts gross income to the extent such coverage is mandated

Instructions For Form Tir 07-16: Personal Income Tax Treatment Of Employer-Provided Health Insurance Coverage For An Employee'S Child Page 2

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