Understanding the Adult Child Benefit Taxability

The value of health care benefits provided to adult children is not considered taxable income for U.S. federal income tax purposes through the calendar year in which they attain age 26; but it is considered taxable income for some non-conforming states

The health premium amount for adult children reduces the employee’s federal taxable gross. However, the health premiums attributed to these adult children should not reduce the state taxable gross for employees in non-conforming states.

The user designates a value of the benefit attributable to the Adult Child in the Benefit Rate table, Nontaxable Before tax deduction class. This value is used to calculate the appropriate state tax. To add the dollar value attributable to the cost of health care benefits provided to adult children to the employee's state taxable gross wages, Taxable Gross Definition Table entries are available for the states that do not conform to the Internal Revenue Code. Both the GL Interface processes can exclude the taxable benefit of these plan types.

For example, an employee has an adult child and the child qualifies for coverage under the adult child rules. The employee is in a state that is not following these federal rules.

The effect of this example is to give the employee the benefit of deducting the over-age child portion at the federal level, but disallowing it at the state level. It imputes income at the state level.

• The Non-taxable deduction class applied at the federal level must reduce gross pay, whereas the Non-taxable Before-tax Benefit deduction class at the state level will add-back to the Federal Taxable Gross.

• For federal taxable gross, you can use the same deduction class B (Before tax) for both the employee and the adult child deductions. You cannot set the same deduction class up twice on a single deduction, so you would combine the employee and adult child’s portions into one amount.

• For state taxable gross, you can use the Non-taxable Before-tax Benefit deduction class because it does not impact federal taxable gross amount, and will impute $5 of income for the state. The ACT Taxable Gross Definition on the Non-taxable Before-tax Benefit deduction class causes it to add the $5 back to the federal taxable gross amount for state taxes. The Taxable Gross Component ID is needed only for states that do not conform to the federal rules. At this time, all states follow the federal rules