Definition of Dependent
Rev. 01/26/06, E-mail Alert 2006-2

The Gulf Opportunity Zone Act (GOZA) includes a clarification of the definition of dependent in conjunction with hardship distributions, flexible spending accounts, and other tax issues.

Definition of Dependent

The Working Families Tax Relief Act of 2004 (WFTRA) provided a uniform definition of “dependent” under the Internal Revenue Code Section 152. The WFTRA change applied toall employee benefit plans as of the 2005 calendar year. The Gulf Opportunity Zone Act (GOZA) of 2005 was enacted with the purpose of extending the relief provided to the victims of Hurricane Katrina to the victims of Hurricane Rita and Wilma and to help the redevelopment of the Gulf areas affected by these storms. In addition, GOZA provided a needed technical correction to the definition of dependent to clarify its application to certain employee benefit plans. This correction is effective retroactively to January 1, 2005.

The definition of dependent could have an impact on the operation of our retirement plans in three areas: first, hardship withdrawals for medical and tuition of children and dependents; second, QDROs naming children or dependent as alternate payees; and third, eligibility for the savers tax credit, which requires that an individual may not be claimed as another individual's dependent, in the event the plan maintains a deemed IRA. Although the statutory change to the definition of dependent may not directly impact the McKay Hochman prototype plan document because the document does not contain a definition of the term "dependent" and does not cross-reference Code Section 152 for this purpose; however, the administration of the plan may be impacted.

It is the responsibility of the plan administrator to define who qualifies as a dependent for plan purposes, including the hardship withdrawal and QDRO issues noted above. The GOZA technical changes to the Code definition of dependent that apply for qualified plan purposes are as follows:

• There is no longer an annual gross income limit to qualify as a dependent. It has been retroactively removed so there is no $3,200 limit for 2005 nor is there any dollar limit for 2006 as had originally been imposed by WFTRA.
  
• The definition of dependent now includes an individual who otherwise meets the definition of dependent, but who is married and filing a joint return.
  
• The definition of dependent also includes an individual who has his or her own dependents, if that individual qualifies as a dependent of another individual.
  
• A divorced or legally separated custodial parent may make a written declaration to waive the right to claim a child as a dependent for purposes of the child credit and the dependency exemption only, but not with respect to other child-related benefits. Pursuant to such a waiver, the noncustodial parent will still be able to claim the child as a dependent for qualified plan purposes.
  

Prior WFTRA Dependent Article