How did New Jersey tax employer health coverage, cafeteria-plan amounts, and medical expenses for an employee's adult child under the Affordable Care Act?

Plain-English summary

New Jersey followed the federal exclusion for qualifying employer-provided adult-child health coverage, but did not follow federal treatment for certain employee-paid cafeteria or flexible-plan amounts.

The TAM said employer-provided accident or health coverage and employer medical-care reimbursements excluded from federal income should also be excluded from New Jersey Gross Income, regardless of the child's age.

New Jersey did not conform, however, for:

• employee-paid coverage that federal law deemed employer coverage; and
• employer-provided reimbursements through arrangements such as employer-sponsored flexible spending accounts.

Contributions to I.R.C. § 125 cafeteria or flexible-benefit plans were generally taxable as wages for New Jersey purposes under the TAM.

The New Jersey medical-expense deduction was narrower than the Affordable Care Act's coverage rule. Although coverage could extend to an adult non-dependent child, the deduction covered expenses for the taxpayer, spouse, and dependents. An adult child's medical costs therefore qualified only when the child was a qualified dependent.

What this means for you

Employers and payroll teams

Separate employer-provided coverage from employee cafeteria-plan contributions. The TAM gave them different New Jersey wage treatment.

Employees covering adult children

Coverage eligibility did not itself make every related payroll amount non-taxable or every medical cost deductible.

Tax preparers

For the medical-expense deduction, determine whether the adult child was a qualified dependent rather than relying only on plan eligibility.

Common questions

Q: Was qualifying employer-paid coverage for an adult child included in New Jersey income?
A: No, when it was excluded from federal income under the treatment described in the TAM.

Q: Were employee cafeteria-plan contributions excluded in New Jersey?
A: No. The TAM says they were generally taxable wages.

Q: Did age alone determine the New Jersey coverage exclusion?
A: No. The TAM applied the exclusion regardless of the child's age.

Q: Could a taxpayer deduct medical expenses for any covered adult child?
A: No. The child had to be a qualified dependent for the New Jersey deduction.

Citations and references

• I.R.C. § 125 — cafeteria plans
• N.J.S.A. 54A:6-24 — cafeteria and flexible-benefit plan treatment
• New Jersey Technical Bulletin 39 — source referenced in the TAM

Source

• Landing page: https://www.nj.gov/treasury/taxation/tam-pubs.shtml
• Original PDF: https://www.nj.gov/treasury/taxation/pdf/pubs/tams/tam14.pdf

Original ruling text

Federal Affordable Care Act, Dependent Coverage for Adult Child
TAM 2011-14 – Issued April 20, 2011
Tax: Gross Income Tax
The Federal Affordable Care Act requires plans and issuers that offer dependent coverage to
make the coverage available for adult children while providing favorable income tax treatment.
For Federal Income Tax purposes, the value of any employer-provided accident/health plan
coverage or employer provided reimbursements made to an employee for medical care for an
employee’s child who, has not yet attained the age of 27 as of the end of the taxable year, is
excluded from the employee’s income. This exclusion applies to IRC section 125 cafeteria plans
as well.
Historically, New Jersey has administered the New Jersey Gross Income Tax to conform to the
Federal Income Tax treatment for much of this type of employer-provided coverage. Therefore,
for New Jersey Gross Income Tax purposes, the value of any employer-provided accident/health
plan coverage or reimbursements for an employee’s child that is excluded from the employee’s
Federal Income should also be excluded from the employee’s New Jersey Gross Income,
regardless of the age of the child, under the Division of Taxation’s long-standing interpretation
of the tax laws.
However, with regard to employee-paid coverage deemed under federal law to be employer
coverage and employer provided reimbursements (i.e.; employer-sponsored flexible spending
accounts) New Jersey does not conform to the Federal Income Tax treatment. These amounts
are generally taxable as wages for New Jersey Gross Income Tax purposes. In accordance with
N.J.S.A. 54A:6-24 and Technical Bulletin 39 at
http://www.state.nj.us/treausry/taxation/pdf/pubs/tb/tb39r.pdf, contributions to cafeteria or
flexible benefits plans provided under Section 125 of the Internal Revenue Code are taxable as
wages for New Jersey purposes.
Additionally, a deduction from gross income is provided on the New Jersey Gross Income Tax
return for medical expenses. Medical expenses generally include nonreimbursed payments for
insurance covering medical care. Medical expenses allowed for Federal Income Tax purposes are
usually allowed for New Jersey Gross Income Tax purposes, but the deduction is limited to
expenses for the “taxpayer, taxpayer’s spouse, and taxpayer’s dependents.” Although the Federal
Affordable Care Act applies to adult, non-dependent children as well as dependent children, the
New Jersey medical expense deduction is limited to dependents. Therefore, taxpayers can only
take the medical expense deduction on the New Jersey return if their adult child is considered a
qualified dependent.

Note: A Technical Advisory Memorandum (“TAM”) is an informational statement of the law,
regulations, or Division policies. It is accurate on the date issued. Subsequent changes in the law
or regulations, judicial decisions or changes in Division policies could affect the validity of the
information presented in a TAM.

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