Monthly Tax Tip - July 2011

Massachusetts has updated its guidelines on the tax treatment of employer-provided health care benefits.

The Massachusetts Department of Revenue has issued a technical information release which provides guidelines relating to the personal income tax treatment of employer-provided health insurance coverage for an employee's child. The statutory change conforms Massachusetts law to federal health care benefit income exclusion rules that are in effect each year. The statutory change is effective for tax years beginning on or after January 1, 2010.

Federal employer-provided health care benefits. The federal law 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. Effective March 30, 2010, the federal law excludes from an employee's gross income any employer-paid expenses incurred for the medical care of an employee's child who has not attained age 27 as of the end of the taxable year.

Massachusetts law. For personal income tax purposes, Massachusetts generally follows the provisions of the Internal Revenue Code (IRC) as amended and in effect on January 1, 2005; however, certain specified IRC sections are adopted as amended and in effect for the current year. The change provides that, effective for tax years beginning on or after January 1, 2010, Massachusetts follows the federal treatment 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.

Employer compliance. Employers that for Massachusetts personal income tax purposes, in taxable years 2010 or 2011, followed the old federal rules in effect as of January 1, 2005, may have reported or withheld upon imputed income to an employee attributable to the value of health care coverage for an employee's 26-year-old child who had not attained age 27 as of the end of the taxable year. Due to the statutory change that is effective back to taxable years beginning on or after January 1, 2010, the value of such coverage is excluded from Massachusetts gross income if it is excluded from federal gross income. So, for 2010, such employer is required to issue Form W-2C (Corrected Wage and Tax Statement) to an employee affected by the statutory change to correct the taxable state wage amount. The employer must remove any imputed income from the employee's 2010 state wages if the value of health care coverage of a child of the employee was included in state wages but was excluded from federal gross income. The employee receiving a Form W-2C can file an amended 2010 Massachusetts personal income tax return if he or she has already filed. An employee who has not yet filed his or her 2010 return must use the Form W-2C showing the corrected state wage amount. Any overpaid amount of withholding in 2010 will be taken into account when the employee files his or her 2010 Massachusetts personal income tax return.

For 2011, it is expected that an employer will adjust the withholding amount of Massachusetts personal income tax for affected employees. At year end, when preparing the 2011 Form W-2 for an affected employee, the employer is expected to make appropriate adjustments to exclude from state wages any amount of imputed income that was included in state wages but was excluded from federal gross income. Any overpaid amount of withholding in 2011 will be taken into account when the employee files his or her 2011 Massachusetts personal income tax return.

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