California Legislature Likely to Pass Retroactive Relief from Imputed Income for Overage Dependent Coverage

California Assembly Bill 36, which will bring state income taxes into line with federal changes under the PPACA, will offer retroactive relief from imputed state income tax resulting from group health coverage extended to employees’ children who are age 24 or older and not full-time students (or not otherwise fulfilling federal income tax dependency requirements prior to PPACA).

Specifically, the bill offers relief from imputed state income back to March 30, 2010, which is the date on which federal tax laws changed to waive dependency requirements for children up to age 26.

The bill is moving forward in the legislative process. Yesterday the Assembly Appropriations Committee approved it with a unanimous vote. The next steps include an Assembly vote and if that is favorable, the Senate will entertain a parallel bill which if passed would go to Governor Brown for signature. It is possible this will all happen by mid- or late-March, but given that the relief will be retroactive that is not a significant concern at this point.

AB 36 is listed number one on the top ten “most popular bills” reported by http://www.aroundthecapitol.com. This bodes well for its swift passage into law, and a collective sigh of relief from employers and payroll providers. For employers who reported imputed income for 2010 there will be a decision point over processing refunds; given the small amounts at issue employers should take a close look at administrative costs for processing refunds, and weigh them against the net benefit to employees. Alternatively the refunds possibly could be calculated and processed through 2011 payroll; with any luck these issues will be addressed by the Franchise Tax Board as the bill nears passage.