California Adopts Federal Tax Treatment of Health Coverage for Adult Children

On April 7, 2011, Governor Jerry Brown signed into law California Assembly Bill 36 (AB 36).  AB 36 conforms certain California income and employment tax laws to certain changes to the United States Internal Revenue Code (the Code) and Internal Revenue Service (IRS) guidance relating to the favorable tax treatment of health benefits coverage for adult children under age 27.  The favorable state tax treatment afforded under AB 36 applies retroactively as of March 30, 2010, which also conforms to the effective date of the parallel provisions under the Code.  For a more detailed summary of AB 36, see our related On the Subject, "Health Care Reform: California Adopts Favorable Federal Tax Treatment of Health Coverage for Adult Children Under Age 27."

Background

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the Act), generally requires group health plans that provide dependent coverage for children to continue to make such coverage available for adult children until age 26, beginning as of the first plan year commencing on or after September 23, 2010.  Effective as of March 30, 2010, the Act also afforded certain favorable tax treatment under the Code with respect to such coverage.  See our related On the Subject, "Health Care Reform: IRS Guidance on Health Coverage for Children Under Age 27."

Discrepancies Between State and Federal Tax Laws

Some states’ tax laws do not automatically conform to corresponding changes in federal tax laws.  Thus, although the Act made various changes to the Code relating to the tax treatment of health coverage and reimbursements for children under age 27, some states’ tax laws did not automatically conform to those changes.  California recently adopted AB 36 to conform to such changes under the Code.

Next Steps for Employers and Plan Administrators

Employers and plan administrators should take action now in the following ways:

• Employers and plan administrators subject to California state tax should take steps to ensure that their reporting and payroll systems comply with the changes made under AB 36.
• Employers and plan administrators should consider circulating employee communications regarding the impact of AB 36.
• Employers and plan administrators should continue to monitor California and other state laws for further tax reform related to health coverage for adult children under age 27.