<nobr>Oct 15, 2004</nobr>

Working Families Tax Relief Act of 2004 (HR 1308)

Executive Summary
We received several calls from ERIC members expressing concern over new uniform definitions for child and dependent in the Working Families Tax Relief Act of 2004 (HR 1308) (WFTRA) and its effect on employer sponsored health plans. HR 1308 was rumored to have disqualified dependent children unless they were under 19 or a full time student if over age 18 and under age 24 or totally and permanently disabled. We have researched the issue and have had discussions with ERIC counsel, staff at Treasury, Joint Committee on Taxation, the House Ways and Means Committee and the Senate Finance Committee. It is our understanding from a reading of the enrolled bill and conversations with counsel and congressional and Treasury staff, that there is no change with regard to Title 26 of the Internal Revenue Code section 105(b) (medical care) and tax treatment of cafeteria plans under section 125. It is possible that the new law may effect section 106 although Treasury staff suggests that any issues concerning section 106 can be resolved through a regulatory process in an expedious manner. It is, however, possible that plans that specifically reference a statutory provision (e.g. I.R.C. sec. 152 "Dependent Defined") may have to be amended to delete such references.

Under the I.R.C. as amended by WFTRA, a dependent can be a "qualifying child" or a "qualifying relative" (with no gross income test applicable to sections 105 and 125 of the Code) there are effectively no changes therefore after applying the new definitions to employer sponsored health plans. If previously a dependent qualified as a qualifying child but no longer does due to the new age and full time student restrictions, one may still qualify under the "qualifying relative" provision since under section 105 of the Code. The gross income test does not apply for qualifying relatives for medical care expenses (the gross income test is "turned off" by the technical amendments of section 207(9) of WFTRA). ERIC's Health Policy Committee will be meeting on Thursday, October 21 in Washington, DC where this issue will be addressed and we will be joined by two staff members of the Congressional Joint Committee on Taxation.

Please review your health plan documents to make sure the "qualifying relative" provision will address any concerns. If there are remaining issues, we can work for a solution by a technical corrections amendment during the lame duck session of Congress planned for November.

Background

Working Families Tax Relief Act of 2004 (HR 1308)

President Bush signed the Working Families Tax Relief Act of 2004 (HR 1308) on October 4th. The Act extends several provisions that expired at the end of 2003 or were scheduled to expire at the end of 2004. WFTRA also contains new provisions including a new uniform definition of child (effective January 1, 2005). The new law creates a uniform definition of qualifying child for the tax benefits that relate to dependent children. Under the new law, a qualifying child must meet three tests: relationship, residence, and age. The uniform definition of qualifying child was established for purposes of the dependency exemption, the child tax credit, the earned income tax credit, the dependent care credit, and head of household filing status. A taxpayer may generally claim an individual who does not meet the uniform definition of qualifying child as a dependent if the present law dependency requirements are satisfied. A dependent may be a qualifying child or a qualifying relative. This new tax simplification provision will cost the federal government $1.6 billion over 10 years mainly due to the more generous child definition for the earned income tax credit.

New Age Requirements for Qualifying Child
Under the new definition, a dependent child must be under the age of 19, a full time student if over age 18 and under age 24, or totally and permanently disabled to qualify as a child. However, as under current law, qualifying children (who are not disabled) must be under age 13 for purposes of the dependent care tax credit and under 17 (whether or not disabled) to qualify for the child tax credit.

Qualifying Relative Option for Health Plans (one may still be a dependent under this provision with no age or income limits)
There are two ways to qualify as a dependent: 1) qualifying child and 2) qualifying relative. Even if a dependent child does not meet the qualifying child test, one may still be a dependent under the qualifying relative provisions of the Code. Under Section 105 there is no age limit and no gross income test to qualify for benefits. For example, if an employee has a child that is 23 years old and not a full time student (or 25 and a full time student) it appears they are eligible to receive health benefits from the tax payer under the qualifying relative provisions. One must still comply with the over all dependency requirement under the Code requiring that the tax payer provide over one half of the dependent's support for the calendar year.

No Intention To Change ERISA Plans
After discussions with staff at Treasury, Joint Committee on Taxation, House Ways and Means and Senate Finance Committee, we have been assured that there is no intention to take away eligibility for adult dependent children with regard to health insurance. Members are urged to review their plans in light of the changes in WFTRA and advise us if the Act causes undue hardship for your plans.

Please contact Edwina Rogers at 202-789-1400 or erogers@eric.org with any additional comments or questions.

Edwina Rogers
Vice President, Health Policy
The ERISA Industry Committee
1400 L Street, N.W., Suite 350
Washington, DC 20005
(202) 789-1400
Cell (202) 674-7800
Fax (202) 789-1120
e-mail: erogers@eric.org
www.eric.org

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