Gulf Zone Opportunity Act Revises Definition Of Dependent

The Gulf Zone Opportunity Act ("GZOA") was signed into law on December 21, 2005. GZOA generally provided federal tax incentives for the Gulf Opportunity Zone (i.e., those areas affected by Hurricanes Katrina, Rita and Wilma). However, GZOA also enacted a number of technical corrections, including several technical corrections to the Working Families Tax Relief Act of 2004 ("WFTRA"). WFTRA was the piece of legislation that impacted your health, vision, dental and/or prescription drug plan definition of dependent and the definition of qualifying individuals under dependent care reimbursement accounts.

Health/Dental/Vision/Prescription Drug Plan Definition of Dependent

As you may know, WFTRA revised Section 152(e) of the Internal Revenue Code (the "Code") to change the circumstances under which a child of divorced or separated parents may be treated as the "dependent" of a non-custodial parent for purposes of an income tax deduction. The changes made by GZOA are reflected in the attached chart. We wanted to make you aware of these changes.

As reflected in that chart, Code Section 152(e) has been revised with respect to the manner in which a deduction may be shifted from the custodial parent to the non-custodial parent. However, the definition of affected children remains the same. Whether you need to amend your health, vision, dental and/or prescription drug plan(s) for these changes will depend upon the manner in which your plan(s) refer to Code Section 152 or the dependency of children of divorced or separated parents. We recommend that you have such plan(s) reviewed to ensure that no amendment is necessary. This is particularly true for any plan which was never amended with respect to WFTRA, as you may be inadvertently providing coverage to individuals who are not tax dependents. While an employer may choose to provide coverage to such individuals, the value of such employer-provided coverage must be reported as income to the employee and the employee's portion of the premium must be treated on a post-tax basis.

Dependent Care Reimbursement Account

As you know, dependent care reimbursement accounts are limited to reimbursements for one of two types of individuals: "Type A Qualifying Individuals" and "Type B Qualifying Individuals." WFTRA made minor changes to the definitions of Type A and Type B Qualifying Individuals. However, the definition of Type B Qualifying Individual referred generally to just "dependents" but not to Code Section 152. GZOA has amended the definition of Type B Qualifying Individual to include specific reference to Code Section 152. The definition of a Type B Qualifying Individual under the Internal Revenue Code now reads as follows:

a dependent of the taxpayer (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B)) who is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than one-half of such taxable year

That is, a "dependent" for purposes of a Type B Qualifying Individual under a dependent care reimbursement account is a dependent as described in Code Section 152, but without regard to

· the prohibition on dependents of a person who is himself being claimed as a dependent ((b)(1)),

· the prohibition on married individuals filing a joint return ((b)(2)), and/or

· the gross income limitation for qualifying relatives ((d)(1)(B)).

Thus, persons can still be a dependent for dependent care reimbursement account purposes despite falling under item 1, 2 and/or 3, provided all other aspects of the definition are satisfied.

Depending upon the language in your flexible benefit/cafeteria plan, an amendment to your plan may need to be made. In any event, it is important that those administering your plan understand this clarification in order to properly administer your plan regarding the definition of Type B Qualifying Individual. As mentioned above, if your plan has not been amended since the passage of WFTRA, you should have it reviewed immediately to ensure that it is compliant with current federal tax law.

If you have any questions concerning these amendments, please contact Melissa Proffitt Reese, Katrina M. Clingerman, or your Ice Miller benefits attorney.

Summary of Code Section 152(e) Amendments
Pursuant to WFTRA	Pursuant to GZOA
Children to Whom 152(e) May Apply
152(e)(1) · Child receives over ½ of support during the calendar year from the child’s parents. · Parents are divorced or legally separated under a decree of divorce or separate maintenance, separated under a written separation agreement, or have lived apart at all times during the last 6 months of the calendar year. · Child is in custody of one or both of parents for more than ½ of the calendar year.	152(e)(1) · (Same as pursuant to WFTRA.)
Manner in Which Exemption May Pass to Noncustodial Parent
152(e)(2) Decree of divorce or separate maintenance or written separation agreement applicable to taxable year beginning in such calendar year provides that: · Noncustodial parent shall be entitled to any deduction allowable under section 151, or · Custodial parent will sign a written declaration that he/she will not claim such child as a dependent for such taxable year.	152(e)(2) · Custodial parent signs a written declaration that he/she will not claim the child as a dependent for any taxable year beginning in the calendar year. · Noncustodial parent must attach this written declaration to the noncustodial parent’s return for the taxable year beginning during such calendar year.
Special Rule for Pre-1985 Instruments
152(e)(2) With respect to an agreement described above executed before January 1, 1985, the noncustodial parent must provide at least $600 for the support of the child during the calendar year.	152(e)(3) · A qualified pre-1985 instrument is a decree of divorce or separate maintenance or written agreement executed before January 1, 1985, and no modification to which on or after such date expressly provides that 152(e) shall not apply to the decree or agreement. · The instrument applicable during the taxable year beginning in such calendar year provides that the noncustodial parent shall be entitled to any deduction allowable under section 151 for the child. · The noncustodial parent must provide at least $600 for the support of the child during the calendar year.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.