Federal Law
In general, federal gross income of employees doesn't include:
Payments Received Under Accident and Health Plans:
Pursuant to Code § 105, employer-provided reimbursements made to employees for their:
- Medical care, or
- A spouse's or dependent's medical care
Contributions by Employer to Employee Accident and Health Plans:
Pursuant to Code § 106, employer contributions to accident or health plans as compensation (through insurance or otherwise), to their employees for personal injuries or sickness incurred by them, their spouses, or their dependents, as defined in Code § 152.
Imputed Income
Non-cash fringe benefits that don’t qualify above are:
- Included in gross income; and
- Are referred to as “imputed income”
Dependent Definition under Code § 152:
An individual must be either a “qualifying child” dependent or a “qualifying relative” dependent. In general:
A “qualifying child” is a child who lives with an employee for more than half a year, who is:
- Either under age 19 or
- A full-time student under age 24; and
- Who doesn’t provide over half of his or her own support for the calendar year
A “qualifying relative” is an individual who bears a relationship to the taxpayer, including any child of the taxpayer:
- Who is not a “qualifying child”, regardless of the child’s age
- Whose gross income is less than the exemption amount, and
- Who receives over one-half of his or her support from the taxpayer
An individual cannot be claimed as a dependent if the individual files a joint return for the year.
Employer-Provided Health Insurance Coverage for Dependents
An employee may exclude from gross income the value of employer-provided health insurance coverage for a child who, while not a “qualifying child,” meets the definition of a “qualifying relative” determined without regard to the child’s gross income.
For purposes of the exclusion from gross income for employer-provided health insurance coverage, a child of an employee who exceeds the age to be a “qualifying child” is:
- A "qualifying relative” if:
- The taxpayer provides over half of the child’s support for the calendar year
In such a case, the child is considered a dependent and there is no federal imputed income charged to the employee.
In those instances where benefits provided to an employee include health insurance for non-dependent children, e.g.,
- Child that is over the age to be a “qualifying child;” and
- Isn't a “qualifying relative”
because the child provides at least half of his or her own support, an amount may be considered imputed income that is included in gross income.
The Affordable Care Act - Amounts Received Under Accident and Health Plans:
The Act generally requires group health plans and health insurance issuers to provide coverage for dependent children up to age 26.
In addition, it broadens the exclusion from gross income for employer-provided health care benefits for an employee's child to the end of the year in which the child attains age 26.
Pursuant to Code §105, in general, gross income of employees doesn’t include employer-provided reimbursements made to an employee for the medical care of the:
- Employee
- Employee’s spouse
- Employee’s dependents
Code § 105 also excludes from an employee's gross income any employer-paid expenses incurred for the medical care of an employee's child who hasn’t reached age 27 as of the end of the tax year.
Pursuant to Code § 106, in general, gross income of employees doesn’t include contributions their employers make to an accident or health plan as compensation (through insurance or otherwise) to:
- Their employees for personal injuries or sickness incurred by them
- Their spouse; or
- Their dependents, as defined in Code § 152
Note the exclusion extends to coverage for an employee's child who hasn’t reached age 27 as of the end of the tax year.
Massachusetts Rules
Massachusetts Follows Federal Treatment
Massachusetts follows the federal treatment of Code §§ 105 and 106 for exclusions from gross income for employer-provided health care benefits.
Thus, to the extent employer-provided health care benefits are excluded from federal gross income, such amounts are likewise excluded from Massachusetts gross income.
COBRA Coverage of Unemployed Workers
Massachusetts conforms to the current Code with regard to the federal exclusion from gross income of the COBRA subsidy under Code § 139C.
This subsidy also applies to health care continuation coverage if required by states for small employers.