by Angela M. Bohmann

As part of a move to simplify the tax code, Congress recently changed the definition of "dependent" for many tax purposes effective January 1, 2005. While the intent may have been simplification, the effect has been confusion in the benefits area.

The changed tax provisions are technical and complicated, and a technical corrections bill may be needed to make the law conform to what the IRS assumes to be Congress’s intent. However, employers should know the following:

* Generally speaking, those persons who could have been covered as dependents under a health plan before the recent change can continue to be covered under a health plan after the change without adverse tax consequences.
* Employees who cover expenses of adult dependents under a dependent care flexible spending account (aging parents) will not be able to cover these dependents unless the dependent has annual income of less than the amount of the dependency exemption for the year ($3,200 for 2005). Therefore, employees who wish to cover daycare expenses for an aging parent who otherwise lives with them will be unable to do so under a flexible spending plan if the parent has more than $3,200 in income.
* Employers should review their plan documents to make sure that the definitions properly describe the persons who should and should not be covered under the plan. For example, if a plan defines "dependent" solely by reference to Section 152 of the Internal Revenue Code, which is the section that generally defines dependents, the definition will now be more limited than the rules described above for health plans. That definition would need to be changed in order to cover, for example, college-aged children who have reached age 24.

Employers with questions about their dependent definition, or who are interested in the technical background of the changes, may contact any member of the Compensation and Employee Benefits practice group.