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May 20, 2011
Adult Children And Imputed Income: What, Who And How?

Like many of your peers in HR and benefits, you’ve been keeping your ear to the ground about updates, changes, and issues arising as a result of the Patient Protection and Affordable Care Act, fondly known as healthcare reform. For this discussion, invite your colleagues from payroll to join, because they are the group that needs to understand one change that may be under their radar.

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The issue is imputed income. Generally, imputed income applies when a person is covered by the healthcare plan but is not an eligible tax dependent, for example, in domestic partner situations. On the surface, this would seem to apply to those adult children of covered employees who are now allowed to remain on their parents’ insurance plans until age 26. But, says Jennifer Benz of Benz Communications, “When healthcare reform mandated coverage for adult dependents, it changed the federal tax rules to say that the coverage would not be counted as imputed income for the employee.” Problem solved?

Well, partially. “Healthcare reform corrected things at the federal level, but not all states have complied with that federal provision,” Benz continues. As of March 8, 2011, 28 states had not yet made the needed changes in their state tax codes. The result is that you may find it necessary to communicate a complex taxation issue with certain employees in your organization.

“There is a question about whether or not this issue will be addressed in the legislative process in time for it not to impact 2010, as well as 2009,” Benz says. “It is an issue that is quickly evolving, and it may be short-lived because all the states may adopt the federal provision. Or, it could be that the issue continues to exist in a handful of states that won’t get around to adopting the federal provision. It’s very complicated and murky at the moment.”

Two paths to choose from

The first thing payroll pros should do is to find out if the state (or states) they’re in have made the changes to avoid imputed income. If not, there is a fork in the road in front of you, and you’ll need to decide which path to take. One, you can wait and see whether your state will adopt the federal provision. Or two, you put things in motion now to ward off problems if that does not occur.

“A lot of the companies we talk to have decided they are going to take a ‘wait and see’ approach,” Benz says. “Right now we think that’s probably okay for most companies because it may be that in the next few months we’ll see the majority of states fix this issue, and it will just go away. But it is certainly something that should be on the radar of benefits and payroll people.”

If you decide to address this issue head-on, Benz believes you should address it only with the group of people directly affected. “It isn’t a significant amount of money that’s going to be taxable in most cases,” she says, “and state taxes are generally not very high to begin with. I don’t think it will make people upset, but I think it will be confusing and frustrating. So the way we have suggested communicating it is not to do a broad communication to all employees. That’s just going to be confusing for most people.

“Instead, find the people who are affected and address communications to them, so they understand what’s going on. Make sure your team understands the issue, and can make sure they’re addressing it effectively on the W-2s and so forth. That is still an open issue; I’m not sure that many companies have figured out how to effectively address it.”

Benz reports that the Silicon Valley Employer’s Forum, a business group concerned with health matters, asked her company to develop a toolkit to help their members facing this situation. As it happens, California recently adopted the federal regulations, rendering it a non-issue there. But the toolkit – available on Benz’ website, www.benzcommunications.com, – is a way companies in the states that will face imputed income issues can prepare. The toolkit includes a checklist that walks companies through many of the issues surrounding adult dependents, Benz says, not just imputed income. For example, it reminds benefits professionals to review all benefit documents for references to dependent eligibility age.

“Something as simple as going through all the documentation, all the communications, all the websites that mention eligibility can be a bit of an undertaking for a large organization,” Benz says. The checklist serves to remind communicators about rocks they may need to turn over.

Watch for unexpected communication issues ahead

Benz offers some advice for HR staff as we all move forward with healthcare reform. “This issue is just one example of the kind of unintended complexity of something that seems simple on the surface. Benefits and HR managers need to take a really thorough look at all the changes coming up in healthcare reform, and make sure they’re thinking through the communications and administrative challenges.

“There is a lot we know, but a lot we don’t know about how things are going to change in the next few years. So having a really solid communications plan in place is going to be key for all of that.”

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