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Patient Protection Act and the Impact on California Tax

Purpose of bulletin

To inform staff that California income tax law has not been amended to conform to the federal income tax rules which exclude the value of the medical coverage provided to adult children from gross income.

Background

The Patient Protection and Affordable Care Act signed by the President in March 2010, requires benefit plans that provide coverage for family members to cover adult children of the employee, to age 26 whether or not they qualify as dependents for tax purposes, effective for plan renewals beginning on or after September 23, 2010.

The Health Care and Education Reconciliation Act of 2010 extends the general exclusion for reimbursements for medical expenses under an employer-provided accident or health plan to any child of an employee who has not reached the age of 27 as of the end of the tax year. This law also amends federal income tax laws to exclude the value of an eligible adult child’s medical coverage from the taxable income of the parent-employee. Federal law also allows self-employed individuals a deduction for health insurance premiums for an adult child under age 27 who is not a dependent.

CA Law

California law has not conformed to the 2010 federal income tax rules which exclude the value of the medical coverage provided to nondependent adult children from California gross income and allow a deduction to self-employed individuals for health insurance premiums for nondependent adult children under age 27.

Tax impact

For California income tax purposes, the fair market value of employer-provided medical coverage for some adult children in excess of the amount paid by the employee for such coverage may result in taxable income to the employee:

  • The additional income is reported and taxable to the employee, not the adult child.
  • The amount of income included in taxable wages is equal to the amount by which fair market value of the taxable benefit received by an employee exceeds the amount the employee pays for the benefit.

In addition, amounts paid by self-employed individuals for health insurance for any child under age 27 who is not a dependent is not deductible for California.

Taxpayer inquiries

For information on how to compute taxable wages, go to edd.ca.gov, and search for “payroll taxes,” or call 888.745.3886, Monday through Friday, 8 a.m. to 5 p.m., except state holidays.