I thought I would pass on some very good news to the California SMB market that impacts both employees and employers.

This week Governor Jerry Brown signed Assembly Bill 36, excluding the value of dependent health coverage from gross income for state tax purposes. The change lifts the tax burden from employees and the administrative load for employers.

The new law takes effect immediately and is retroactive. Employers that issued Form W-2 for 2010 including the amount of medical coverage for dependent adult children in California wages may need to issue Form W-2C excluding the amount from California wages. The details and specific instructions for employers can be found at the Franchise Tax Board website.

The California tax issue was caused by a discrepancy between state and federal income tax laws that arose when Health Care Reform was passed in March 2010. The Patient Care and Affordable Care Act (PPACA) requires health insurance companies to make coverage available to dependents up to age 26, regardless of the child’s student or marital status, or financial dependence on the employee. At the federal level, the value of employer-provided coverage was excluded from the employee’s gross income. However, California state tax law did not conform to the federal tax rules, requiring employees to pay income tax on the value of coverage provided to dependents. AB 36 has corrected this discrepancy.

Another issue that was solved recently…Employer-Provided Health Coverage Informational Reporting Requirements. More about this can be found at the IRS website.

Special thanks to Dan over at Mindshare Group for keeping me up to date on these employer related tax matters!


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