WFTRA's Changes to Code Section 152

Pre-WFTRA, an individual would qualify as a dependent of a taxpayer if the individual satisfied a support test and satisfied a relationship test or a residency test.

WFTRA divides dependents into "qualifying child" and "qualifying relative" categories. These new categories also introduced some new requirements that must be satisfied in order for an indivdual to be considered a dependent.

At this time, a Technical Correction Bill was passed to exclude many of the new requirements when considering an individual's dependent status for health plans under a Cafeteria Plan. At this time, no such Bill has been passed for Dependent Care Assistance Programs, so WFTRA does affect the Cafeteria Plans. Therefore, Plan Documents and SPD's should be amended to reflect WFTRA.

Let's break this down. To be defined as a "Qualifying Child" there are 4 major requirements. First, there must be a relationship between the taxpayer and the child. Second, there is a residency test. Third, there is an age test (is the child under 19; is the child under 24 and a full-time student; is the child totally and permanently disabled). Fourth, does the child have limited self-support? In other words, has the child provided over half of their own support during the taxable year? If all categories are passed, the child will be considered a "Qualifying Child" under the new rules. As before WFTRA, there are special rules for determining "Qualifying Child" status for divorced parents and there is also a special rule for a tie-breaker when 2 or more taxpayers can claim the same individual as a "Qualifying Child".

To qualify as a "Qualifying Relative" there are also 4 major requirements. First, there must be a relationship between the taxpayer and the individual. The relationship to the taxpayer must be that of a child, brother or sister, stepbrother or stepsister, parent or stepparent, brother or sister's son or daughter, son, daughter, father, mother, brother or sister-in law or an individual, who for the taxable year has the same principal abode as the taxpayer and is a member of the taxpayer's household. Second, there is an income test. The individual's gross income for the calendar year must be less than $3,200 (for 2005). The Technical Correction Bill provides that the income test does not apply for purposes of determining whether dependent health benefits are tax free. Third, the individual must pass the support test, meaning that the individual must have received over half of his support from the taxpayer during the calendar year. Fourth, the individual cannot be a "Qualifying Child" of the taxpayer or any other taxpayer.

This information is meant to provide you with a general overview of the changes to the definition of a dependent under the Cafeteria Plan. If you have a question about the status of a dependent, please call our office at 214-559-0472, option 5, for assistance.