Instructions For Form Tir 07-16: Personal Income Tax Treatment Of Employer-Provided Health Insurance Coverage For An Employee'S Child (Page 5 of 6) in pdf

The child is considered a dependent for purposes of the income exclusion for employer-provided

health insurance coverage. Under IRS Notice 2004-79, the child is a “qualifying relative” because,

(1) the child receives over half of her support from her mother, and (2) for purposes of the

exclusion from gross income for employer-provided health insurance, the amount of the child’s

earnings is disregarded. As a result, there is no imputed income to the mother for federal or

Massachusetts purposes.

However, the mother is not allowed to claim either a federal or a Massachusetts dependency

exemption for the child. The child is not a “qualifying child” because the child’s age exceeds the

maximum age. Also, the child is not a “qualifying relative” for purposes of the dependency

exemption because the child’s earnings exceed the exemption amount ($3,400 in 2007).

Example 2. A child of divorced parents, age 25, is a full-time student who lives with his mother. The

father is a Massachusetts resident. The child is included in the father’s employer-provided health

insurance coverage. The child is supported by both his parents. Under the terms of the divorce

agreement, the mother may claim the federal dependency exemption for him.

The child is considered a dependent for purposes of the income exclusion for employer-provided

health insurance coverage. Under IRS Notice 2004-79, the child is a “qualifying relative” because

the child is supported by his parents. For both federal and Massachusetts purposes, there is no

imputed income to the father as a result of the employer-provided health insurance coverage of

the child.

Because of the terms of the divorce agreement, the father does not take a dependency exemption

for the child. However, the mother is entitled to take the federal dependency exemption for the

child. The child is not a “qualifying child” because the child’s age exceeds the maximum age.

However, the child is a “qualifying relative” for purposes of the dependency exemption because

the child has no earnings. If applicable, the mother is entitled to take the Massachusetts

dependency exemption for the child.

Example 3. A child, age 25, who earns $30,000 does not live with the parent (and the parent does

not otherwise provide over one-half of the child’s support). As a result of the expanded coverage

required by the Massachusetts health care reform law, the child is included in the parent’s employer-

provided health insurance coverage.

The employer’s carrier is required to make coverage available for this child for two years after the

end of the calendar year in which such person last qualified as a dependent under IRC § 106 or

until the child reaches 26 years of age, whichever occurs first.

The child is not considered a dependent for purposes of the income exclusion for employer-

provided health insurance coverage. The child does not come within the requirements of IRS

Notice 2004-79 because the child does not receive over half of his or her support from the parent.

Thus, for federal purposes, the value of health insurance coverage for the age-25 child will be

imputed income to the employee. In contrast, under G.L. c. 62, § 2(a)(2)(Q), Massachusetts does

not impose tax on this imputed income because the coverage is required by state law.

The parent is not allowed to claim a federal or Massachusetts dependency exemption for the child.

The child is not a “qualifying child” because the child’s age exceeds the maximum age; the child is

not a “qualifying relative” because (1) the child does not receive over half of his or her support

from the parent, and (2) the child’s earnings exceed the exemption amount of $3,400 in 2007.

[1]

The reference to 26 U.S.C. 106 is section 106 of the Internal Revenue Code. Also, prior to the

clarification in the technical corrections Act, the health care reform law required that on or after

January 1, 2007, 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 following loss

of dependent status under the Internal Revenue Code, whichever occurs first.”

]If a child of a taxpayer is a “qualifying child,” there will be no imputed income resulting from

employer-provided health insurance coverage. This TIR focuses on the instances where a child of a

taxpayer who is not a “qualifying child” may be a “qualifying relative.” Whether such children meet the

requirements of “qualifying relative” is the determining factor as to whether the employee is charged

Instructions For Form Tir 07-16: Personal Income Tax Treatment Of Employer-Provided Health Insurance Coverage For An Employee'S Child Page 5

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