For all of us, life is a continuing process of change—marriage, birth, adoption, new job, divorce and death. These major changes are called life events.
When one of these major events occurs in your life, you will need to rethink and, possibly, make changes to certain benefits, such as health insurance (medical, dental and vision), life insurance, flexible spending accounts (FSA) participation, and retirement.
Be aware that some changes can only be made within 30 days of the life event. Changes not made within the 30-day time frame may result in coverage not being changed until the annual open enrollment period. Open enrollment is held each year in October and changes made during this time are effective January 1st of the upcoming year.
Tax Implications of Sponsored Dependents
Adding a sponsored dependent has significant tax implications to consider. Employees pay their premiums on employer-provided group medical, dental and vision insurance plans with “pre-tax” deductions. However, the IRS requires that the fair market value of the benefits provided for a person who is not the employee’s dependent for federal income tax purposes, is considered a taxable employer provided benefit to the employee. This added employer provided benefit is called imputed income and is subject to all applicable taxes. Imputed income will apply to medical, dental, vision and educational benefits provided for sponsored dependents.
Medical, Dental & Vision: The following are examples showing the amount of the pre-tax deduction and imputed income when adding sponsored dependents to the medical, dental, and/or vision insurance plans.
Educational Benefit: The full value of the educational benefit provided for Sponsored Dependents will also be imputed income and subject to applicable taxes. For example: A sponsored dependent taking three hours of undergraduate classes might have $1370 due in tuition. The educational benefit is 50% of tuition, so there would be $685 of imputed income.
If your sponsored dependent(s) qualifies as your dependent as defined by IRS (found under §Section 152 of the Tax Code), the imputed income may not apply. If this is the case, please click here for the Tax Status Declaration Form. This is not intended as tax advice but rather to alert employees of potential tax consequences.
Please contact the Benefits Staff (205-348-7732) for more details.