Wisconsin adopts federal tax treatment of health insurance

The good news has finally arrived. On Friday, November 4, 2011, Governor Walker signed legislation that adopts the federal income tax treatment of employer-provided health insurance coverage for adult children, generally exempting such coverage from state taxation.

Under the new law, employer-provided health insurance coverage for an adult child will be tax-free through December 31 of the year in which the child turns age 26. If an employer provides health insurance coverage to an adult child during a year in which the child turns age 27, however, the “old rules” apply with respect to that child’s health insurance coverage. Under these “old rules,” an employer must assess whether the child is a “qualifying child” or “qualifying relative” to determine whether the value of an adult child’s health insurance coverage will be subject to Wisconsin income taxes.

Importantly, the change to Wisconsin’s tax law is retroactive to January 1, 2011. This means that the value of health insurance coverage provided to an adult child during 2011 will not be reportable on a plan participant’s 2011 Form W-2 unless the adult child turned age 27 during 2011 and was not the employee’s qualifying child or qualifying relative for 2011. This means that employers offering health insurance coverage that covered children who turned age 27 or older in 2011 will still need to consider whether coverage for a child who reached age 27 or older in 2011 generates taxable income to the employee covering the child. One way to do that would be to ask employees for verification of the dependent status of those children.

Employers who have already imputed the income associated with the value of health insurance coverage for adult children under the “old rules” and withheld corresponding Wisconsin income taxes may wish to change their withholding approach for the remainder of 2011. Employers that wish to address prior withholding are advised to consult with an employment tax advisor to explore potential options. Such employers will also want to notify affected employees of the change.