Health Care Tax Law Fix Wins Passage in Assembly

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The federal government also amended the Internal Revenue Code to reflect that the value of the coverage provided for these adult children as well as any payments/reimbursements made by the employer for the medical expenses of such children is not taxable income to the parent.

Last year, California legislation expanded medical coverage to dependents up to the age of 26 in order to match the federal health care law. The state law, however, did not adopt the federal tax rules for adult child medical coverage or medical payments.

As a result, the fair market value of medical coverage provided to adult children from 19 to 25 years of age is now taxable income in California, except if other exclusions that existed in the law before the adoption of the state law apply. The exceptions are:

The child is (a) under the age of 24; (b) a full-time student in the calendar year; (c) maintains the same principal residence as the parent for at least half of the year; and (d) receives more than one-half of his/her annual financial support from the parent; or the child is permanently and totally disabled, regardless of age.

Due to this glitch in the law, businesses and employees in California are faced with the administrative and financial burden of determining the fair market value of the insurance coverage or medical payments provided solely for the adult child in order to properly calculate the state taxes owed.

AB 36 seeks to resolve this discrepancy between California and federal tax law, thereby relieving California businesses and employees from this unnecessary cost. Conforming to federal law and treating the value of the adult health care coverage as non-taxable income would be an income tax reduction for employees, and a payroll tax reduction for employers.

AB 36 passed the Assembly on a vote of 74-0 on March 3. It now awaits assignment to a policy committee in the Senate.