By: Alan M. Levy

On November 4, 2011, Wisconsin ceased requiring that employers withhold state income tax on the imputed cost of their employees’ health insurance premiums for children who were dependents as defined by federal, but not by state law.

Last year’s federal health care legislation provided that the children of employees participating in their employers’ health care programs must be treated as covered dependents until the end of the tax year in which they become 26 years of age. This “dependent” status no longer changed if, for example, the child had a job by which he/she could obtain health insurance, was married, or was not a student. While the Internal Revenue Code treated this expansion of coverage as tax-free, Wisconsin did not amend its tax code accordingly. Thus, an adult child could have dependent coverage tax free for IRS purposes, but the employer had to compute the portion of that benefit cost attributable to the child and then withhold that amount for state income tax of the parent-employee.

2011 Wisconsin Act 49 revokes this tax rule retroactively to January 1, 2011. Withholding the tax on the imputed income should cease immediately. However, no refund should be made by the employer; the amount withheld thus far will be credited as an excess tax payment on the employee’s state tax return for 2011 income.

One caution: the new Wisconsin rule is only parallel to the federal rule: it ends with the end of the tax year in which the child reaches age 26. If, for whatever reason (unless exempt for an unrelated reason), the child continues as a dependent on the parent’s employer-sponsored health insurance after that year, the imputed income and state withholding tax apply as before.

The employer should be sure to include on the employee’s W-2 form the full amount withheld for this benefit prior to the law change so it can be correctly and entirely treated as tax paid and thus subject to credit and/or refund.

If there are any questions about this new rule, please contact Alan Levy  at Lindner & Marsack, S.C.

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