The Kentucky Legislature has not adopted the federal income tax treatment of the extended healthcare insurance coverage for adult children under age 27. This means that Kentucky employees who have adult children who qualify for health insurance under the new federal law will not receive the same treatment for Kentucky income tax purposes as they will under the federal tax laws. In general, employers must treat the amounts paid for adult children as being paid with post-tax dollars for the Kentucky income taxes if those adult children are not eligible for the gross income exclusion.
However, the Kentucky Department of Revenue is currently taking the position that an employer and employee can continue to cover healthcare costs for adult children on a pretax basis if the cost to cover the adult dependent does not change the overall cost of the health insurance. For example, if an employee already has coverage for children or the employer does not charge a cost per dependent, then the employer and employee can continue to allocate the healthcare costs as pretax. But if an employee changes tiers by adding an adult dependent, the healthcare cost cannot be allocated to the pretax category. Employers should make an adjustment on the W-2 to show the difference between federal and Kentucky wages as a result of the extended healthcare insurance.