This is a summary of the analysis of eligible dependent status in the context of employee benefit plans, including Flexible Benefit Plans (pre-tax premiums and FSAs), HRAs, and HSAs. For each plan, the only individuals eligible to receive tax-favored coverage are the employee, employee’s spouse, and employee’s qualifying dependents. The dependent definition has changed twice since 2005, including recent changes from the Health Care Reform law (Affordable Care Act, or “ACA”). This summary is updated to reflect those changes and current law.
The New Definition of Dependent
The Working Families Tax Relief Act of 2004 (“WFTRA”) went into effect on January 1, 2005 and changed the definition of eligible dependent for purposes of health benefit plans. WFTRA modified IRS Code Section 152, which governs who may receive tax-favored health coverage. Under these rules, to be an eligible dependent and receive tax-favored coverage, an individual must meet the requirements to be either a “qualifying child” or “qualifying relative” of the employee. WFTRA originally included a 4-part test for Qualifying Child. ACA has since further expanded the definition of eligible dependent. The WFTRA test is now supplemented by ACA’s new Age 26 rule, which will subsume most of the “qualifying child” and “qualifying relative” categories. The tests for Qualifying Child and Qualifying Relative remain unchanged, but a third category “employee’s child” has been added. Below are the requirements for each category.
If the individual qualifies under any of the three categories as listed below, he/she can receive tax-favored benefits as an eligible dependent of the employee. If the individual does not qualify under any category, he/she cannot receive tax-favored benefits.
I. Employee’s Child
Per ACA, for eligible group health plans, to be an eligible dependent as an Employee’s Child, an individual must be a child of the employee and must not have turned 27 as of the end of the taxable year. For the purposes of this category, the definition of a child includes a biological or adopted son or daughter, step-son, step-daughter, and eligible foster children. Once it is determined that a dependent is an employee’s child and is under the age of 27 at the end of the taxable year, no further analysis of residency, support, or any other criteria is necessary. For purposes of tax coverage – pre-tax premiums, Health FSA, and HRA participation – the adult child is eligible until the end of the taxable year in which the child turns 26.
Note regarding Age 26 Mandate for Health Insurance Plans: For purposes of group health coverage, a plan that offers dependent coverage must continue to make coverage available to an adult child until the child turns 26. For instance, for group health insurance coverage (fully insured or self-insured), on the child’s 26th birthday, the child would no longer be eligible for coverage (COBRA event).
Note regarding HSA bank accounts: The definition for an eligible dependent for purposes of Health Savings Accounts has not changed. The age 26 rule does not apply. An employee who owns a HSA bank account can have expenses submitted for a spouse and any tax dependent (including children up to age 19 or 24 if a full-time student).
II. Qualifying Child
To be an eligible dependent as a qualifying child, an individual must meet four specific criteria:
- Relationship: A qualifying child must have a specified relationship to the employee.
- Residency: A qualifying child must have the same principal place of abode as the employee for more than one-half of the taxable year.
- Age: A qualifying child must be under age 19 (under age 24 if a full time student) as of the close of the calendar year in which the employee’s taxable year begins.
- Limited Self-Support: A qualifying child must not provide more than half of his/her own support for the taxable year.
III. Qualifying Relative
To be an eligible dependent as a qualifying relative, an individual must meet four specific criteria:
- Relationship: A qualifying relative must have a specified relationship to the employee.
- Income: A qualifying relative’s gross income for the taxable year must be less than the exemption amount defined in Code §151. [Note: the 2012 exemption amount is $3,800.]
- Limited Self-Support: A qualifying relative must not provide more than half of his/her own support for the taxable year.
- Not Anyone Else’s Qualifying Child: A qualifying relative must not be a qualifying child of the employee or any other taxpayer for any taxable year.
Other Special Rules
There are other special rules for exceptional circumstances, including the availability of health coverage to children of divorced or separated parents. Those special rules are not outlined here, but if you have questions about a possibly exceptional situation, contact us or your benefits advisor for further assistance.
Sometimes it is confusing when an employer’s health plan contains a different definition of “dependent” than the IRS Code. Keep in mind that for purposes of health benefit plans, the IRS Code controls in all cases, and the plan cannot adopt the health provider’s definition of dependent if it is broader than the definition under the IRS Code.
Note regarding Domestic Partners: One issue that is often a source of confusion is whether a domestic partner of an employee (same or opposite sex) would qualify as a spouse or dependent of the employee for tax-favored benefit coverage. Since in most cases a domestic partner does not qualify as a spouse of the employee, often this question comes down to whether the domestic partner meets the requirements to be a qualifying relative. Generally, a domestic partner does not meet the qualifying relative standard, since the relationship test requires a specified relationship between the employee and individual that is not recognized in most states. As a result, any coverage allowed by an employer for domestic partners would be taxable coverage. The domestic partner analysis will vary based on state law. For more information on that topic, contact us or your plan advisor.
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