Instructions For Form Tir 07-16: Personal Income Tax Treatment Of Employer-Provided Health Insurance Coverage For An Employee'S Child (Page 4 of 6) in pdf

for Massachusetts purposes where the health care coverage is required by state law. For an affected

employee, the Massachusetts gross income for the year, as reflected in his or her W-2, will be lower

than federal gross income.

B. When does an employee’s child meet the definition of dependent for purposes of employer-

provided health insurance coverage so that the entire value of the coverage is excluded from

gross income?

Under federal tax law, employer contributions for health insurance are excluded from an employee’s

gross income. However, the exclusion is limited to contributions made for coverage of the employee,

the employee’s spouse, and the employee’s dependents.

In general, for a child to be considered a dependent under the Internal Revenue Code, the child must

meet the requirements of a “qualifying child” or a “qualifying relative” as described below. Pursuant to

IRS Notice 2004-79, the definition of “dependent” for purposes of the exclusion from gross income for

employer-provided health insurance benefits is broader than the definition for purposes of claiming the

dependency exemption for the child on the parent’s federal income tax return. So achild may qualify

as a dependent for purposes of the exclusion from gross income for employer-provided health

insurance benefits whether or not the parent actually claims the dependency exemption for the child

on the parent’s federal income tax return.

Divorced Parents. For purposes of the exclusion from gross income for employer-provided health

insurance, 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.

Qualifying Child (Age Requirement):

Relationship: The child must be the taxpayer’s son, daughter, stepchild, sibling or stepsibling. A

descendant of any of the above also qualifies (e.g., taxpayer’s grandchild). A legally adopted child

or a child lawfully placed with the taxpayer for adoption is treated as a taxpayer’s child. A foster

child legally placed with the taxpayer is also treated as the taxpayer’s child.

Residency: The child must have the same principal place of abode as the taxpayer for more than

half of the taxable year. Temporary absences because of special circumstances, including illness,

education, business, vacation or military service, do not prevent the child from qualifying.

Age: In general, the child must be under age 19 (or under age 24 if a full-time student) as of the

end of the calendar year. In the case of an individual who is permanently and totally disabled, the

age limits are waived.

Support: The child must not have provided more than half of his or her support for the year.

If a taxpayer’s child does not meet the requirements of a dependent as a “qualifying child,” the

child may still meet the requirements of a dependent as a “qualifying relative.”

Qualifying Relative (No Age Requirement):

Support: The child must have received over half of his or her support from the taxpayer for the

calendar year. In contrast to the rules for a qualifying child (see above), there is no residency

requirement for a taxpayer’s child to meet the definition of a qualifying

relative.[5]

Income limits: Under IRS Notice 2004-79, for purposes of determining whether there is an

exclusion from gross income for employer-provided health care benefits, there is no limit on the

child’s gross income. (By contrast, for purposes of determining whether a child is a “qualifying

relative” for the dependency exemption, the child’s gross income must not exceed the exemption

amount of $3,400 for 2007.)

C. When does employer-provided health insurance coverage for an employee’s child result in

imputed income to the employee?

In the context of employer-provided health insurance benefits, the following examples illustrate when

imputed income occurs and when it does not.

Example 1. A child, age 25, who earns $10,000 receives over half of her support from her mother

and is included in the mother’s employer-provided health insurance coverage.

Instructions For Form Tir 07-16: Personal Income Tax Treatment Of Employer-Provided Health Insurance Coverage For An Employee'S Child Page 4

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