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New definition of ‘dependent’ sparks benefit-law confusion

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in Employee Benefits Program,HR Management,Human Resources,Leaders & Managers,Management Training

Issue: A new law simplifying the federal government's definition of "dependent" will make your benefits compliance more complex.

Risk: A greater threat of noncompliance and tax penalties.

Action: Check with your benefits vendors to see if you're in compliance.

You know what they say about good intentions ...

Well, Congress had good intentions when it recently merged the U.S. tax code's five different definitions for a "dependent" into one, common definition. (Internal Revenue Code Section 152)

This simplification will make life easier for individuals who are wondering if they qualify for the child tax credit, dependent exemption, earned income tax credit, dependent care credit and for people who file as "head of household" status.

The problem for HR: Many employee benefit plans use the tax code's definition of "dependent," so HR professionals are scrambling to see how the changes affect various sections of their benefits packages, including health plans, dependent care assistance, 401(k) hardship distributions and deferred compensation plans.

According to the Society for Human Re-source Management (SHRM), the new definitions apply in some confounding ways.

For example, employees can typically take penalty-free "hardship withdrawals" from their 401(k) accounts in certain cases, including medical expenses and college tuition. But if they're taking the withdrawal for a dependent who doesn't fit under the new definition, employees can't take the hardship distribution.

Advice: The law is set to take effect

Jan. 1. Look for the IRS to issue guidelines this month that clarify and/or fix some of the problems. In the meantime, talk with your benefits vendors to see how the new law affects your benefits plan and what changes, if any, you need to make before year-end.

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