Calif. bill would end state tax on adult-child health cover

SACRAMENTO, Calif.—The California Assembly has approved legislation to enable employers to extend health care coverage to employees' adult children without employees being subject to state taxes on the coverage.

The legislation, A.B. 36, that the state Assembly approved on a 74-0 vote Thursday would conform California tax law with the federal health care reform law. The measure has been sent to the California Senate.

The health care reform law requires employers to extend health care coverage to employees' children up to age 26. Subsequent Internal Revenue Service rules said the coverage can be extended on a tax-free basis through the end of the year in which the child turns 26.

However, California law sets a five-part test, all of which must be satisfied for the coverage to be excluded from employees' taxable income. Among other things, the child must be younger than 19 or 24, if a full-time student. As a result, if an employee added an adult child who did not satisfy the test, the portion of the health insurance premium attributed to the child would be considered taxable wages and subject to California taxes.

Benefit experts have said roughly 15 to 20 states had not yet changed their tax laws to enable employers to provide the adult child coverage on a tax-free basis.

However, at least two states—Arizona and Maine—last month passed bills to eliminate the adult child coverage taxation issue.