On November 7, 2011, Wisconsin Governor Scott Walker signed legislation conforming the Wisconsin income tax treatment of employer-provided health insurance benefits for non-dependent adult children under age 27 on December 31 to that of the federal income tax treatment of the same adult children. The law is retroactive for Wisconsin to January 1, 2011. Effective for taxable years beginning on or after January 1, 2011, the Wisconsin treatment of health insurance benefits provided to an adult child who has not attained the age of 27 by December 31st of the applicable tax year will be the same as the current federal treatment income tax treatment. This means health benefits for those individuals will be tax-free.
How Taxation Has Changed Due To This Legislation
Previously, employers were required to add the fair market value of the health insurance benefit provided to a non-qualifying dependent to the employee's income. Whether an adult child qualified as a “dependent” was based upon the definition of “dependent” under the Internal Revenue Code. The fair market value amount added to income was also known as “imputed income.” The employee (parent of the adult child) then paid state and federal taxes on this imputed income.
Effective March 30, 2010, the federal government changed the law. Employers were no longer required to add the fair market value for the health insurance benefit to the employee's income, and parents did not have to report the additional income on their federal income tax return.
The November 7, 2011 legislation simplifies Wisconsin’s state income tax law. This change is retroactive to January 1, 2011. Employers no longer need to add the fair market value for the health insurance benefit to an employee’s income, and parents will not need to report the additional income on their state income tax return. To receive this income tax benefit, the child must be younger than age 27 on December 31st.
What Does This Mean For Employees and Employers?
Employers should stop adding the fair market value of the health insurance benefit to their employee’s income. When employers prepare W-2 statements for 2011, they should not include any imputed income previously added for the health insurance benefit. Employees will ultimately be credited back for any prior Wisconsin incomes taxes withheld with regards to the imputed income on adult child health insurance benefits. This will be done when the employee files his/her 2011 Wisconsin income tax return. As a result, employers will not need to refund any previous income taxes withheld.
As an addendum to this change, some employers may have questions surrounding the taxation of dental and visions plans.The Income and Excise Tax Division of the Wisconsin Department of Revenue believes employers should not impute income for Wisconsin income taxes if they are not doing so currently for federal tax purposes on employer-sponsored dental and vision plans. However, the Wisconsin Department of Revenue is currently working with the federal Internal Revenue Service to finalize decisions on this topic. As updates are obtained, we will provide additional guidance.
The Horton Group recommends the following:
- Effective with the next payroll, discontinue imputing health insurance benefits as income.
- When generating 2011 W-2’s for employees, imputed income for health insurance benefits should not be included.
- Those participants who have had imputed income withheld previously should be advised to file for a refund. Employers should avoid an attempt to retrospectively “fix” this situation.
- Many employers utilized a form to determine if a child was an eligible dependent, and if income should be imputed. Currently, we are researching whether or not a form will be needed. Once a determination is finalized, we will convey the information.
Please contact your Horton representative if you have any further questions.