IRS Clarifies “Qualifying Relative” Definition for Health Plans

January 4, 2021
Hall Benefits Law, LLC

The IRS recently released final regulations to clarify the definition of “qualifying relative” following the suspension of the personal exemption deduction for 2018-2025 created by the Tax Cuts and Jobs Act of 2017 (TCJA).

Background

In August 2018, the IRS issued Notice 2018-70 which stated that it would issue proposed regulations to clarify the definition of “qualifying relative” for the TCJA-created $500 credit for dependents and head of household filing status for 2018-2025, the years in which the exemption amount is zero. The $500 credit applies to two categories of dependents: (1) qualifying children for whom a child tax credit is not allowed, and (2) qualifying relative as defined in section 152(d). 

According to Notice 2018-70, the IRS said it would issue final regulations under which the zero personal exemption deduction for tax years 2018-2025 would not be a factor in determining qualifying relative status. Instead, the IRS said it would rely on an Income test in making that determination.

Final Regulations

Consistent with Notice 2018–70, the final regulations provide that, in determining whether an individual is a qualifying relative for purposes of various provisions of the Code that refer to section 152 in taxable years in which the exemption amount is zero, the inflation-adjusted section 151(d) exemption amount will be:

  • $4,150 for taxable year 2018 
  • $4,200 for taxable year 2019 
  • $4,300 for taxable year 2020 

Although the income test is generally not used for determining qualified relative status for purposes of benefit-related rules, it may be relevant in certain circumstances, such as determining HSA-ineligible tax status for dependents.

We help our clients stay on top of the legislative and regulatory changes that apply to their businesses, and we ensure that benefit plans and processes are updated to stay in compliance. To learn more, call our team today at 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.