This Capital Checkup summarizes provisions that affect health plans and dependent care assistance programs (DCAPs). To go directly to one of the provisions listed below, click on the underlined text:

• Definition of "Dependent" in Section 152 of the Internal Revenue Code (IRC) Significantly Revised
• New Eligibility Requirements for DCAPs
• Mental Health Parity Act Extended
• Archer Medical Savings Account (MSA) Program Extended
• Other Changes

Definition of "Dependent" in §152 of the IRC Significantly Revised

The new law attempts to streamline and simplify the tax code by establishing one uniform definition of the term "qualifying child" for the purpose of determining eligibility for five tax code provisions that provide benefits to taxpayers with children: the dependency exemption, the child credit, the earned income tax credit, the dependent care credit and head of household filing status. These changes, which take effect on January 1, 2005, were not intended to have a significant impact on employee benefit plans, but because they amend a critical IRC section - §152 (the definition of "dependent") - these changes have the potential to affect every benefit plan that provides benefits on a tax-favored basis to employees' dependents. Because tax-favored health coverage is only available to dependents who meet the definition set out in §152, now that §152 has been revised substantially, health plan sponsors may need to make technical amendments to their plan documents if they want to continue providing coverage to the same types of dependents. For more information about the implications of this change, see The Segal Company's December 2004 Bulletin for employers, "Benefit Implications of the New IRC Definition of 'Dependent'" or Segal's December 2004 Bulletin for sponsors of multiemployer plans, "New Tax Code Definition of 'Dependent' Creates Confusion and Challenges for Multiemployer Health Plans". (To return to the list of benefits provisions at the top of this Capital Checkup, click here.)

New Eligibility Requirements for DCAPs

The WFTRA makes certain changes to the eligibility requirements for the dependent care tax credit. WFTRA provides that an individual no longer has to maintain a household (i.e., the taxpayer provides more than half of the cost of maintaining the household) in order to claim the dependent tax credit. In addition, the law adds a new requirement that when receiving the tax credit for a dependent who is physically or mentally incapable of caring for himself or herself, the dependent must have the same principal place of abode as the taxpayer for more than half the taxable year, and the dependent must have a gross income under $3,200 in 2005.

The changes concerning the place of abode and gross income requirements are relevant to employers with DCAPs because the eligibility rules for these programs are generally the same as those that apply for the dependent care tax credit. Employees that elect to contribute to a DCAP plan for their elderly parents, for example, may be especially affected by the WFTRA, because the law changes the rules for when the parent may be considered an eligible dependent. Specifically, the parent must live with the employee for at least one-half of the year, and must have gross income under a specific limit ($3,200 in 2005) in order to be eligible. Employees who have chosen to contribute, but whose parents are no longer eligible dependents, may change their election either before the beginning of 2005 or prospectively thereafter.

To return to the list of benefits provisions at the top of this Capital Checkup, click here.

Mental Health Parity Act Extended

The WFTRA extends the provisions of the Mental Health Parity Act (MHPA) in ERISA, the Public Health Service Act (PHSA) and the IRC through December 31, 2005. The provisions in ERISA and the PHSA were due to expire on December 31, 2004. The MHPA provisions in the IRC expired at the end of 2003. The WFTRA also states that the MHPA Code provisions do not apply for the period between January 1, 2004 and the date of the enactment of this law. As a result, no excise tax can be levied by the IRS against a plan for a violation of the MHPA between January 1, 2004 and the enactment of this law on October 4, 2004. (To return to the list of benefits provisions at the top of this Capital Checkup, click here.)

Archer MSA Program Extended

The WFTRA also extends the Archer MSA pilot project through the end of 2005. Previously no new contributions could be made to an Archer MSA except for those individuals who had MSA contributions and employees that were employed by an MSA-participating employer prior to the end of 2003. The new law extends the Archer MSA program through 2005. In addition, the law extends the date that trustees of MSAs are required to make certain reports to the Treasury Department from August 1, 2004 to 90 days after the enactment of the WFTRA. Under the MSA pilot project there are a maximum number of MSAs that can be established. If it is determined in a year that the maximum number has been reached, the Secretary of the Treasury is required to publish this determination. The WFTRA extends the time period for publishing this determination to 120 days after the enactment of WFTRA. (To return to the list of benefits provisions at the top of this Capital Checkup, click here.)

Other Changes

In addition, the new law makes certain technical changes related to Health Savings Accounts (HSAs). The law amends the Trade Act of 2002 to provide that amounts distributed under an HSA should not be taken into account to determine the amount of the health coverage tax credit available for those eligible for the tax credit under the Trade Act. (To return to the list of benefits provisions at the top of this Capital Checkup, click here.)

As with all issues involving the interpretation or application of laws, health plan sponsors should rely on their legal counsel for authoritative advice on the Working Families Tax Relief Act of 2004. The Segal Company can be retained to work with plan sponsors and their attorneys to evaluate the impact of the law and comply with it.

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