Tax Article -Imputed Income

Target Audience: Health Care, Healthcare Insurance Carriers, Employer Provided Healthcare Beneficiaries, Massachusetts Employers with Imputed Income Requirements, Employees Maintaining Family Health Insurance Coverage, Calculating Imputed Income, Health Care Management Consulting Interest

The Massachusetts Health Care Reform Act of 2006 requires a broadening of dependent coverage offered by health insurance carriers. In so doing, the Act also created a potential imputed income tax liability for employees who benefit from employer provided health insurance. Those at risk of the imputed income trap are employees who maintain family health insurance coverage through an employer provided fringe benefit, and included in the employee’s family is an individual who does not meet the definition of a “qualifying child” or “qualifying relative” under federal income tax rules. 

For example, a qualifying relative under the federal income tax rules includes a child who exceeds the age limitation of a qualifying child where the taxpayer provides over one-half of the child’s support. In the case where the taxpayer does not provide over one-half of the child’s support and, therefore, does not constitute a “qualifying relative”, this child may, nevertheless, be covered under the broadened dependent coverage provisions of the Massachusetts Health Care Reform Act. In this case, an employer must determine the amount of imputed income attributed to the health insurance coverage of such child for federal income tax purposes. 

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Pending specific guidance from the Internal Revenue Service, an employer must determine the amount of imputed income attributable to the health insurance coverage of an employee’s nondependent child under valuation principles expressed in federal income tax law. Although it can be argued that, in the case where the employee is covered under a family plan with qualifying dependents and there is no incremental cost for adding individuals under the plan, there is no economic value provided to the employee and, therefore, imputed income would be zero, this position is subject to challenge. 

Since Massachusetts has addressed the impact of the mandated coverage by excluding the requirement to impute income, this requirement would only be applicable for federal purposes.

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