Wisconsin Eliminates Income Tax Disparity on Health Coverage for Adult Children

On November 4, 2011, Governor Walker signed into law 2011 Senate Bill 203 now known as 2011 Wis. Act 49. The bill, which received large bipartisan support among Wisconsin legislators, exempts from Wisconsin income tax the value of health coverage provided to certain adult children.

Background

Prior to 2010, most employers’ health plans provided coverage for children of employees up to age 19, or up to age 23 if the child was a full time student. Effective January 1, 2010, Wisconsin imposed a new rule requiring insurance carriers and certain self-funded governmental plans to provide eligibility for coverage for children through age 26 (up to the day before the child’s 27th birthday).

On March 23, 2010, the federal Patient Protection and Affordable Care Act (“PPACA”) was enacted. It required employer health plans to cover older children through age 25 (up to the day before the child’s 26th birthday), effective for calendar year health plans on and after January 1, 2011. Under the then current federal Internal Revenue Code, however, this coverage would be considered taxable income to some parents.

Then a week later on March 30, 2010, Congress amended the federal Internal Revenue Code to exclude from taxable income health coverage that a taxpayer receives for a child up to the end of the calendar year in which the child reaches age 26. Thus, the imputed income problem was solved for federal tax purposes.

In June of 2011, Wisconsin modified its insurance eligibility rules to adopt the federal eligibility rules under PPACA, effective January 1, 2012 (or upon expiration, extension, modification or renewal of an applicable collective bargaining agreement, if later). Thus, under both Wisconsin and federal law health coverage must be made available for children up through age 25. However, Wisconsin did not modify its tax rules, which continued to observe the previous version of the federal Internal Revenue Code, so the coverage of an employee’s child subject to Wisconsin income tax in some circumstances. To the extent such coverage has been taxable for Wisconsin income tax purposes, employers have been required to report this coverage as income on the employee’s W-2 form and to withhold the appropriate amount from wages.

Amendment to Wisconsin Tax Code Eliminates Obligation to Impute Income for Adult Child Health Coverage

With the enactment of 2011 Wis. Act 49, the Wisconsin Tax Code and the federal Internal Revenue Code are again consistent. Wisconsin employees are no longer subject to taxation for this coverage and Wisconsin employers are no longer required to impute as income the value of such coverage for tax withholding and W-2 reporting purposes. The new law is effective retroactive to January 1, 2011. This may result in some over withholding for some employees to date, but with a reduction in taxable income, this provides for a somewhat lower Wisconsin tax liability when tax returns are filed next year.

A copy of 2011 Wis. Act 49 can be found here.