Compliance Central

The Patient Protection and Affordable Care Act effective March 30, 2010, amended the Internal Revenue Code (IRC) to provide an exclusion from an employee’s gross income for employer-provided coverage under a health plan that covers the employee’s child through the end of the taxable year in which the child turns age 26.

In addition, the Health Care and Education Reconciliation Act of 2010 amended the IRC effective March 30, 2010, to extend the general exclusion from gross income for medical care reimbursements under an employer-provided health plan to include reimbursements for an employee’s child who has not attained age 27 as of the end of the tax year. Prior to the above legislation, an employee wouldn’t have received these benefits unless the child was the employee’s dependent.

Some states conform to the current version of the IRC: Colorado, Connecticut, Delaware, District of Columbia, Illinois, Kansas, Louisiana, Michigan, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, and Utah.

The following is a list of the latest information on whether a state that doesn’t conform to the current version of the IRC has adopted the federal rules.

• Alabama conforms to the federal tax treatment of medical care reimbursements, but it does not allow employer-provided coverage under a health plan to be excluded from the employee’s gross income.
• Arizona has not yet adopted the federal provisions. The Arizona Legislature will consider a bill to retroactively conform to the federal changes during the current legislative session.
• Arkansas has not yet adopted the federal provisions. The Arkansas General Assembly is currently in session for the first time since the federal legislation was enacted.
• California does not conform to the federal provision that excludes the value of employer-provided health insurance premium payments for an employee’s nondependent adult child under the age of 27 from gross income. As a result, the reporting of the insurance premium wage amount on Form W-2 will be different for California and federal tax purposes (see FTB Tax News Alert, 1/24/11, and EDD Tax Branch News #122, 1/24/11).
• Hawaii conforms to certain IRC sections as of April 1, 2010, but not to the federal health benefits legislation noted above.
• Idaho conforms to a version of the IRC that was enacted prior to the federal health benefits legislation. A retroactive federal conformity bill will be introduced in the upcoming legislative session.
• Iowa has announced that it is conforming to the federal provision that allows the value of employer-provided health insurance coverage for an employee’s child to be excluded from the employee’s gross income through the end of the taxable year in which the child turns age 26 (see Iowa Department of Revenue Notice, Health Care Coverage for Nonqualified Dependents, 12/23/10).
• Kentucky has not adopted the federal provisions. It is advising employers, effective Jan. 1, 2011, to treat the amount of health insurance paid for adult children as being paid with post-tax dollars for Kentucky income tax purposes if the amount paid for those adult children would not be eligible for the gross income exclusion under the IRC in effect on Dec. 31, 2006. There will be differences between federal and Kentucky wages on Form W-2 (see DOR 2010 Employer Health Insurance Notice, 12/27/10).
• Maryland adopted the above federal provisions, but not until Jan. 1, 2011.
• In Massachusetts, the value of health insurance coverage for an employee’s child under 27 years of age is now generally tax-free to the employee if the coverage was provided under a Code Sec. 125 cafeteria plan.
• Minnesota has not yet adopted the federal legislation. There will be differences between federal and Minnesota wages on Form W-2 (see DOR December 2010 Withholding Tax Announcements, 12/1/10). The 2011 Minnesota legislature may elect to adopt the federal provisions retroactively.
• Mississippi conforms to the new federal rules.
• Ohio follows the federal rules and extends the exclusion to children who are 28-years-old.
• Oregon has not yet adopted the federal legislation. There will be differences between federal and Oregon wages on Form W-2 (see Oregon DOR News Release, 12/2010). The 2011 Oregon legislature may elect to adopt the federal provisions retroactively.
• In Pennsylvania, the health benefits and contributions for an adult child under the age of 27 are excluded from Pennsylvania gross income if provided under a Code Sec. 125 cafeteria plan.
• South Carolina conforms to a version of the IRC that was in effect prior to the federal legislation. Until the state legislature addresses the federal legislation, South Carolina employers are required to add back the income that was excluded under the new federal law.
• Virginia will follow the federal rules until the matter has been addressed by the Virginia General Assembly.
• Wisconsin has not adopted the federal legislation. There will be differences between federal and Wisconsin wages on Form W-2 (see Wisconsin News for Tax Practitioners 08/03/2010, 08/03/2010).

A preliminary draft of the 2011 Form 941, Employer’s Quarterly Federal Tax Return, was released by the Internal Revenue Service. The draft form is subject to changes and a final version of Form 941 for the first quarter is scheduled to be released by late February, occurring after the filing period for the fourth quarter of 2010. 

The draft form has several changes, including calculations to reflect the 2011 reduction of the employee portion of the Federal Insurance Contributions Act (FICA) tax. For wages earned in 2011, the employee Social Security tax rate is 4.2 percent and the Medicare tax rate is 1.45 percent.  The draft form warns employers not to complete lines 6a-6d, which are reserved for future use. On Form 941 for 2010, the lines deal with exempt wages and tips paid to qualified employees during a quarter.

 Visit the IRS website for more details.

Beginning with the first quarter of 2011, employers in California are required to file a Quarterly Contribution Return and Report of Wages (DE 9) (Form DE-9) and a Quarterly Contribution Return and Report of Wages (Continuation) (Form DE-9C) each quarter.  The change to quarterly reporting will allow the California Employment Development Department (EDD) and employers to identify overpayments more quickly, which will result in faster refunds. In addition, EDD will be able to promptly notify employers of any amounts due.

Employers will report their unemployment insurance, employment training tax, state disability insurance, and personal income tax withholding payments quarterly on Form DE-9 instead of annually on Form DE-7, the Annual Reconciliation Statement.   Detailed wage information for each worker will be reported on new Form DE-9C, instead of Form DE-6, Quarterly Wage and Withholding Report.  Even active employers who paid no wages during the quarter must sign and file a DE-9C.  Employers will still use the DE 6 and DE 7 to file for years prior to 2011.

Registered employers will receive the new forms automatically by mail starting in 2011. For more information about the new forms for 2011, please review the 2011 Payroll Tax Reporting Changes FAQs on the CA EDD website.

Form W-4

The IRS has released the 2011 version of Form W-4, Employee’s Withholding Allowance Certificate.  The instructions note that an employee cannot claim exemption from withholding if: (1) the employee’s income exceeds $950 (unchanged from 2009 and 2010) and includes more than $300 of unearned income (for example, interest and dividends), and (2) another person can claim the employee as a dependent on his or her tax return. Employers must withhold from the pay of any employee who had claimed exemption from withholding in 2010, but who does not provide a new Form W-4 to continue the exemption by February 15, 2011.

The IRS advises employees who have more than one job, or who are married and both spouses work, with combined earnings from all jobs exceeding $40,000 ($10,000 if married), to look at the Two-Earners/Multiple Jobs Worksheet on page 2 of the instructions to avoid having too little tax withheld. The above amounts have changed from $18,000 ($32,000 if married) in 2010.  

The IRS also advises employees to use the 2011 version of IRS Publication 919, How Do I Adjust My Tax Withholding?, after Form W-4 takes effect, to confirm that the amount they are having withheld is sufficient, particularly if the employee’s income is projected to exceed $130,000 (single) or $180,000 (married) in 2011.

Publication 15

The 2011 Publication 15 (Circular E), Employer’s Tax Guide is also available on the IRS website.  The publication covers employers’ employment tax responsibilities and includes the 2011 wage bracket and percentage method withholding tables.  Publication 15 also discusses recent changes affecting employers, including the 4.2 percent employee tax rate for Social Security, the expiration of the Making Work Pay credit, and the extension of the COBRA premium assistance credit.