n-04-79.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Section 106-Contributions by Employers to Accident and Health Plans

Effect of the Working Families Tax Relief Act of 2004 on employer-provided
accident or health plans.

Notice 2004-79

# I. PURPOSE

This notice provides guidance regarding the effect of the Working Families
Tax Relief Act of 2004 (WFTRA), Pub. L. No. 108-311, 118 Stat. 1166, on the
exclusion from the gross income of an employee under § 106 of the Internal
Revenue Code (Code) of employer-provided coverage under an accident or
health plan.

# II. BACKGROUND

Section 201 of WFTRA amended the definition of dependent in § 152,
effective for taxable years beginning after December 31, 2004. Pursuant to
§ 152, as amended, an individual must be either a "qualifying child" or a
"qualifying relative" to be a dependent. Section 152(c), as amended, provides
that an individual must meet relationship, residency, and age requirements to be
a qualifying child. In addition, an individual is not a qualifying child if the
individual provided over one-half of his or her own support for the calendar year.
Section 152(c)(3)(A) provides that an individual meets the age requirement if the
individual has not attained age 19 as of the close of the calendar year or if the
individual is a student who has not attained age 24 as of the close of the
calendar year. Under § 152(c)(3)(B), an individual is treated as meeting the age
requirement if the individual is permanently and totally disabled (as defined in
§ 22(e)(3)) at any time during the calendar year.

Section 152(d)(1), as amended, provides, in general, that a qualifying
relative is an individual who bears a relationship to the taxpayer described in
§152(d)(2), whose gross income is less than the exemption amount (as defined
in §151(d)), who receives over one-half of his or her support from the taxpayer,
and who is not a qualifying child of the taxpayer or any other taxpayer.

Section 207 of WFTRA contains several technical and conforming
amendments to Code sections that refer to the § 152 definition of dependent,
including an amendment to § 105(b). Section 105(b) generally excludes from an
employee's gross income employer-provided medical care reimbursements paid
directly or indirectly to the employee for the medical care of the employee and

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the employee's spouse and dependents, as defined in § 152. Under the WFTRA
amendment to § 105(b), an individual's status as a dependent for purposes of
§ 105(b) will be determined without regard to new § 152(b)(1) and (b)(2), which
contain certain exceptions to the definition of dependent, and without regard to
new § 152(d)(1)(B), which contains the gross income limitation for a qualifying
relative. It appears that the intent of Congress in making these conforming
amendments was to maintain the current law definition of dependent for
purposes of employer-provided medical care reimbursements.

Section 106(a) provides that the gross income of an employee does not
include employer-provided coverage under an accident or health plan. Thus,
premiums and other amounts that an employer pays on behalf of an employee to
an accident or health plan are not included in gross income. Treas. Reg.
§ 1.106-1 provides that the exclusion from gross income extends to contributions
which the employer makes to an accident or health plan on behalf of the
employee and the employee's spouse or dependents, as defined in § 152.
Because the reference to "dependents" under § 106 appears only in the
regulations under that section and not in the statute itself, Congress made no
conforming amendments to § 106 in WFTRA.

Under current law, the exclusion under § 106(a) for employer-provided
coverage under an accident or health plan parallels the exclusion under § 105(b)
for employer-provided reimbursements of medical care expenses incurred by the
employee and the employee's spouse and dependents, as defined in § 152.
However, as a result of the changes made by WFTRA, the definition of
dependent in § 105(b) differs from the definition in the regulations under
§ 106(a). Accordingly, if the regulations under § 106(a) continued to be applied
as currently written after the effective date of section 201 of WFTRA, the value of
employer-provided coverage for an individual who is not a qualifying child and
who does not meet the gross income limitation for a qualifying relative would
have to be included in the employee's gross income. Because the intent of
Congress was not to change the definition of dependent for purposes of
employer-provided health plans, regulations under § 106 should be revised to
provide that the same definition of dependent applies to § 106 as applies to
amended § 105(b).

# III. APPLICATION

The IRS intends to revise the regulations at 26 C.F.R. 1.106-1 to provide
that the term "dependent" for purposes of § 106 shall have the same meaning as
in § 105(b). The revised regulations will be effective for taxable years beginning
after December 31, 2004.

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Taxpayers may rely on this Notice pending the issuance of the revised
regulations. Accordingly, an employee may exclude from gross income the value
of employer-provided coverage for an individual who meets the definition of a
qualifying relative except that the individual's gross income equals or exceeds
the exemption amount.

# DRAFTING INFORMATION

The principal author of this notice is Barbara Pie of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For
further information regarding this notice, contact Ms. Pie on (202) 622-6080 (not
a toll free call).