The IRS has issued Notice 2004-79 clarifying some of the confusion over changes made to the definition of dependent by the Working Families Tax Relief Act of 2004 (“WFTRA”). WFTRA changed the definition of dependent under section 152 of the Code, but did not make conforming amendments to section 106 of the Code. (Congress apparently did not make conforming amendments to ? 106 in WFTRA because the reference to ?dependents? under ? 106 appears only in the regulations under that section and not in the statute itself.) The IRS has clarified the situation as follows:
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).
The IRS states that they will 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), and that the the revised regulations will be effective for taxable years beginning after December 31, 2004.
(More here in this previous post.)