(April 8, 2011) Governor Jerry Brown yesterday signed a California Chamber of Commerce-supported bill that conforms the state with federal law by removing the state tax on health care coverage for adult children.
AB 36 (Perea; D-Fresno) specifically provides conformity between California and federal law regarding the taxable status of health care coverage for an adult child up to the age of 26, as well as payments or reimbursements made by an employer for an employee’s adult child. The law takes effect immediately.
Federal Health Care Law
The federal Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, both passed in March 2010, allowed children up to the age of 26 to remain on their parents’ health care plans. 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.
California SB 1088 (Price; D-Los Angeles), signed and chaptered on September 30, 2010, expanded medical coverage to dependents up to the age of 26 on or after September 23, 2010 in order to match the federal health care law. SB 1088, 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 was taxable income in California, except if other exclusions that existed in the law before the adoption of SB 1088 applied.
Without the passage of AB 36, businesses and employees in California would have been 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.
CalChamber supports AB 36 because it resolves this discrepancy between California and federal tax law and thereby relieves 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 is an income tax reduction for
employees and a payroll tax reduction for employers. The intent of the federal health care law and SB 1088 was to expand insurance coverage to adult children.
Staff Contact: Jennifer Barrera