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Health coverage change has hidden costs in CA

February 7, 2011 12:00:00 AM PST
Bad news for thousands of parents in California: The federal law that allows them to provide health insurance coverage for their grown children contains hidden costs. Those costs will become very evident at tax time.

The Federal Healthcare Reform Law brought relief for thousands of California parents last fall. It meant they could continue providing health insurance for their adult children up to the age of 26.

Judy Pipkin of Silicon Valley enrolled her 25-year-old daughter onto her husband's health plan, even though it cost more to add an extra person.

"We're not rich people. But our children need health insurance," said Pipkin. "What are we supposed to do?"

But as Californians are preparing their income tax returns, many of those parents are learning they now have a bigger tax bill. The state considers employer contributions to the health benefits of non-dependents as income.

For the Pipkins, that $4,000 benefit pushed them into a higher bracket and increased their tax liability.

"Our taxes are high as it is, and we can't even claim our daughter on our taxes," said Pipkin.

State Assemblyman Henry Perea (D-Fresno) is championing a proposal to exempt health benefits from taxable income, just like they are from federal taxes. A similar proposal failed last year.

"We want to make sure that as parents continue to work hard, continue to have their children on as dependents, that they're covered and they're not taxed and they're not penalized," said Perea.

There's no formal opposition to the proposal yet, but if parents have to pay more taxes, the financially struggling state would get a $12-million windfall.

Families like the Pipkins hope the state legislature passes the exemption as soon as possible. Otherwise, they might be forced to make a difficult decision.

"We were totally shocked. And they were giving us the choice of taking her off the health plan," said Pipkin.