Adult Child Health Coverage Has California Tax Implications

January 28, 2011  |  From HRCalifornia Extra

California’s tax code has yet to be revised to conform with federal tax treatment of adult children remaining on their parents’ health insurance plans. Consequently, the value of the coverage is considered income for state tax purposes.

The state Employment Development Department (EDD) released a notice on January 24 regarding the manner in which employers can calculate the “value” of the medical coverage to the adult employee for purposes of determining the employee’s income. The EDD stated that the income to the employee “would be the difference between the insurance premiums paid including the non-dependent adult child and the amount that would have been paid without the adult child.” This additional income must be reflected on the employee’s W-2.

A significant provision of the federal health care reform package allowed adult children to remain on their parents’ insurance plans up to 26 years of age, regardless of whether such children qualify as a “dependent” for tax purposes. The federal health care reform package also amended the Internal Revenue Code to provide that the premiums an employee pays for insurance coverage for an adult child are excluded from the employee’s taxable wages.

In September 2010, California extended the eligibility age for health care coverage to children up to 26 years old in order to conform to federal law. California, however, has yet to revise its tax code to conform to federal law as to the taxable treatment of such coverage. The value of the medical coverage provided to an adult child up to 26 years of age, who does not otherwise qualify for tax-free medical coverage, is currently considered a part of the employee’s gross wages for purposes of California’s personal income tax and must be reported on the employee’s W-2.​​​