WI Definition of a Dependent

In Wisconsin, dependents can include children up to age 27

On January 1, 2010, children up to age 27 may be eligible to be a dependent.

In the 2009-2011 State Budget Bill (AB 75), the Wisconsin legislature made a change to Wisconsin insurance law that expands coverage for children beyond existing definitions of dependent. The new requirement becomes effective at the first renewal after Jan. 1, 2010.

Under the new law, self-funded plans sponsored by Wisconsin counties, cities, villages, towns and school districts and fully-insured health plans must provide dependent coverage to children up to the age of 27. Private employers who self-insure their health plans are not subject to this requirement.

To be eligible to continue coverage to age 27, the child must meet the following criteria:

The child must be less than 27 years of age;
The child cannot be married;
The child cannot be eligible for coverage under a group health benefit plan that is offered by the child’s employer where the amount of the child’s premium contribution is no greater than the premium amount for coverage as a dependent under the parent’s plan.

Tax Implications
A change in dependent coverage can create a tax issue for employers and employees. The new Wisconsin definition of dependent differs from the definition under the Internal Revenue Code (the Code) related to group health coverage. For example, a child who is 19 or older, is not a full-time student and does not receive at least half of his/her support from the employee is not considered a dependent under the Code.

If coverage is provided to a child who does not qualify as a dependent under the Code, the value of the child’s coverage paid by the employer (or deducted from pay pre-tax through the Section 125 plan) must be treated as taxable income to the employee. The IRS has not provided guidance on how to calculate the value of the “non-dependent” coverage, however the same situation exists for plans that choose to provide domestic partner coverage.

In the case of domestic partner coverage, the IRS has provided informal guidance on acceptable logic to use in calculating the value of the non-dependent coverage:

Use the cost of single coverage under the plan
Use the cost of two-party coverage minus the single premium if applicable
In no case may the value equal $0, even if there is no actual premium increase for adding an additional dependent. (For example: An employee already carries family coverage and adds a 26-year-old to the plan. In this case, the employee must still have taxable income added to their pay based on the value of the coverage for the “non-dependent” child even though the premium has not actually changed.)

Until the IRS provides additional guidance, employers should use reasonable methods to determine the values of the coverage provided to “non-dependents” and add that to the employee taxable income.

Employers that offer a Health Reimbursement Arrangement (HRA), Health Flexible Spending Account (FSA), or Health Savings Account (HSA) are also affected by this change.

HRAs/FSAs
The HRA and FSA reimburse an employee for expenses incurred by the covered employee, spouse or dependent. For these purposes, “dependent” is defined by the Code. Therefore, if a child covered by the medical plan is not a dependent under the Code, expenses for that child cannot be reimbursed by the HRA or FSA.

If expenses that fall under the deductible are automatically submitted to the HRA or FSA for reimbursement, employers should ensure their carriers and/or TPA’s are modifying their system(s) to ensure expenses incurred by an individual who is not a dependent under the Code are not being submitted or reimbursed.

HSAs
With the HSA, the HSA owner may set aside money on a tax-favored basis to pay for eligible medical expenses incurred by the employee, spouse or dependent. In this case, "dependent" is defined by the Internal Revenue Code. Therefore, distributions taken for expenses incurred by an individual who is not a dependent under the Code will be taxable.

Disclaimer
This document is provided for informational and educational purposes only. It is not intended to, nor does it, provide any form of legal advice regarding the subject matter of the documents. You should not take any actions on the basis of this document, but instead should seek legal advice regarding your issues.