Employee Benefits Update - September 2011September 26, 2011
No Change in Wisconsin Tax Treatment of Dependent Children Coverage
Health care reform legislation passed in 2010 generally requires employer-sponsored health plans that provide dependent coverage to offer that coverage to an eligible employee's adult child up to age 26, regardless of the child's income, residency or marital status. An employee's "child" for this purpose includes a son, daughter, stepchild, adopted child, or eligible foster child. This coverage mandate applies whether the employer's plan is insured or self-insured.
To minimize the financial consequences associated with this mandatory expansion of health plan coverage, Congress also changed U.S. tax law to make an adult child's coverage (including medical flexible spending account ("FSA") coverage) tax-free for federal purposes through the year of his or her 26th birthday. However, Wisconsin has not yet updated its state tax code to conform with this federal tax code change. Consequently, employers with employees in Wisconsin must impute income to those employees on the fair market value of an adult child's coverage and medical FSA reimbursements if the child does not qualify as a "dependent" for Wisconsin tax purposes. Under current Wisconsin law, a child will qualify as an employee's "dependent" only if he or she is a dependent under the Internal Revenue Code's pre-health care reform rules.
This disjoint between federal and Wisconsin tax laws has created significant administrative challenges for affected employers. It was hoped that the Wisconsin legislature would conform the Wisconsin tax code with the federal dependent tax rules during the biennial budget process. Unfortunately, that did not happen. (Although the legislature did adopt some health care reform changes, the dependent child tax rules were not included.) As a result, Wisconsin is now the only state that has not conformed to the federal tax rules on this issue. Until the legislature acts, employers with Wisconsin employees must continue to impute income and withhold Wisconsin state income taxes on the fair market value of health plan coverage and medical FSA reimbursements provided to adult children who do not qualify as tax dependents under Wisconsin law.
Employers that are affected by these rules should adopt policies to address the applicable tax issues. Determining the correct taxable amounts can be complicated, and failure to withhold the necessary taxes can trigger substantial penalties. If you need assistance or have any questions, please contact Todd Cleary at 414.287.9433 or at firstname.lastname@example.org.
Wellness Program Tax Credit Legislation Introduced in Wisconsin
Legislation has been introduced in Wisconsin which would provide a state income and franchise tax credit of up to 30 percent of the amount an employer pays in a tax year to provide a workplace wellness program to its Wisconsin employees. A workplace wellness program is a health or fitness program that includes a health risk assessment. Although health risk assessments generally can include a variety of procedures and tests, a health risk assessment for this purpose must satisfy certain requirements. Specifically, a health risk assessment is a computer based health promotion tool that includes: 1) a questionnaire; 2) a biometric health screening to measure vital health statistics (including blood pressure, cholesterol, glucose, weight, and height); 3) a formula for estimating health risks; 4) an advice database; and 5) a means to generate reports. A workplace wellness program must also include one or more of the following programs or services:
- smoking cessation
- weight management
- stress management
- worker injury prevention programs
- health screenings
- nutrition education
- health or fitness incentive programs
- employee physical examinations
The legislation, if passed, would be effective January 1, 2012, and the credit would be available for up to three tax years. However, employers would be required to apply to the state for certification of the amount of the credit, and only up to $5,000,000 in aggregate credits will be allocated to businesses in any single tax year. Generally, up to $2,500,000 of those credits would be aggregated per year to businesses with more than 50 employees, and up to another $2,500,000 would be allocated per year to businesses with 50 or fewer employees. The credit would not apply to amounts paid by an employer to acquire, construct, rehabilitate, remodel or repair facilities to provide the workplace wellness program.
Partnerships, limited liability companies and S corporations would not be eligible to claim the credit. However, it appears that partners, members and shareholders of those entities could claim the credit. Consequently, those entities would be required to compute the amount of the credit and pass on the applicable information to partners, members and shareholders.
There are several open questions as to the tax credit's mechanics. For example, it appears that an entity that takes the credit one year may be subject to tax on the credit the next year. If so, the value of the credit would be less than appears at first glance. In any case, these questions have been posed to the Wisconsin Department of Revenue and we are awaiting answers.
If you have any questions, please contact Todd Cleary at 414.287.9433 or email@example.com.