Qualified Dependents vs. Non-Qualified Dependents

Employees adding dependents to their health insurance programs must indicate whether their dependents qualify as internal revenue code (IRC) "eligible dependents" under Section 152.

Treatment of Non-Qualified Dependents

Employees adding coverage for domestic partners or children who do not meet the IRC Section 152 definition of qualified dependents, will be taxed on the value of the coverage for the dependent coverage. We have determined the fair market value of dependent coverage. The fair market value is different for the number of non-qualified tax dependents enrolled on your plan and the insurance plan selected. We will include this excess value of the non-qualified dependent in your gross income and it will be subject to federal and state withholding and FICA and be reported on your form W-2 at the end of the year. There will be two taxation issues to be addressed.

Employer Share of Premium Paid to Insurance Carrier

The fair market value (FMV) of the coverage provided for the non-qualified domestic partner and/or the partner's children, less any after-tax contributions, is taxable to the employee and subject to federal income tax, social security, and Medicare taxes. The FMV is not subject to retirement. The taxable amounts are to be regularly taxed as part of payroll reporting and reported in employees' paychecks and their annual Forms W-2 Wage and Tax Statements.

The FMV captured will represent the actual premium paid by the College to Blue Cross Blue Shield for the coverage selected.

Treatment of the Employee Contribution for Non-Qualified Dependents

The part of the employee contributions for non-qualifying Section 152 dependents cannot be deducted on a pre-tax basis because they are not eligible for the IRC Section 125 treatment.

The link below will provide a table that reflects the correct combination of pre-tax and post-tax amounts, depending upon the plan option.

Blue Cross Blue Shield 2009 Non-Tax Dependent Rate Sheet

Tax Issues Related to Dental Insurance Coverage

Employee contributions for non-qualifying IRC Section 152 dependents cannot be deducted on a pre-tax basis because they are not eligible for the IRC Section 125 treatment. Therefore, employees covering domestic partners or non-qualified dependents will have both a pre-tax and post-tax premium deduction. This is not a College-funded benefit; therefore, no additional taxation applies.