The Sacramento Bee –
Feb. 7: Thousands of California parents leaped at the chance to provide health coverage to their grown and uninsured children when a provision in the federal health care law took effect last fall.
Now some of those parents, such as Barry Demant of Folsom, are finding a hidden cost to the new benefit: a bigger tax bill. A loophole in California’s tax law requires the state to levy income taxes on the premiums employers pay to provide health insurance to the non-dependent children of their workers.
Last fall, Demant added his unemployed 25-year-old daughter to his company’s group health plan. That meant he no longer had to pay $180 a month to insure her through a separate individual health policy.
As part of the federal health care law, insurers are required to allow parents to enroll children up to age 26 on their health plans. “I wanted to give the health care law a chance, and I thought it would be a great opportunity, even if only selfishly, to reduce the amount I pay for her premiums,” Demant said.
He found out about the tax when his human resources department told him that a bump in income and taxes would soon appear in his paycheck. In the end, he said, some of the money he thought he was saving could evaporate in the form of increased state tax payments. Demant would not say exactly how much more he’ll be paying in taxes.
As Californians begin preparing personal income tax returns, some lawmakers are pushing to pass a law that would exempt those contributions from being subject to state personal income taxes, as was done on the federal level.
“The federal health care law dramatically changed things, and not all states have kept up with the pace of those changes. And we’re trying to make sure that we’re doing what’s right for our working families,” said Assemblyman Henry Perea, D-Fresno, who chairs the chamber’s Revenue and Taxation Committee.
Perea is a co-author of legislation, AB 36, that would conform the state tax code to federal rules that exempt the benefit from taxable income. A similar effort last year died when it was included in broader tax legislation that never made it to the governor’s desk. This time, proponents are hoping stand-alone legislation will get the necessary support.
By changing the tax code, budget-strapped California would lose a $92 million tax windfall, according to estimates by the Franchise Tax Board. “We shouldn’t consider it as a loss,” Perea said. “The benefit of making sure young adults have health insurance outweighs this new source of revenue.”
The new federal health care law was hailed as an answer to the millions of 20-somethings who go uninsured after falling off parents’ health plans.
Typically, dependents who aren’t bound for college have been pushed off their parents’ policies soon after graduating from high school. As many as 8.8 million young adults between the ages of 19 and 25 were uninsured in 2008, according to the Kaiser Family Foundation.
In California, about 1.3 million in that age group could benefit from the new rule, according to Young Invincibles, an advocacy group pushing to expand health coverage among the country’s young.
The new law went into effect Sept. 23 and required insurers and companies to offer the coverage. Because adult children typically don’t qualify as dependents under the tax code, employer contributions on their behalf are being counted as income by the state. The federal government exempted those contributions.
Dolores Duran-Flores, a lobbyist for the California School Employees Association, said she was surprised when she learned last month that the state would be taxing the health benefits.
Health care is an important issue for the 219,000 members of the union, mostly school support staff, already beset with layoffs and furloughs.
“It just makes sense to close this loophole,” she said. “There’s a glitch in the law, and we need to do something about it.”