As most plan sponsors are aware, under the Healthcare Reform Act plans that cover dependents must generally offer coverage for children until age 26 regardless of student, marital or dependent status. (Grandfathered health plans do not have to offer such coverage if the child has employer-provided coverage.) The Healthcare Reform Act also amends the Internal Revenue Code to provide favorable tax treatment with respect to the coverage of adult children. In Notice 2010-38, the Internal Revenue Service provided guidance regarding this tax treatment. The notice confirms that the value of coverage for an adult child through the end of the year in which the child turns age 26 is not included in the employee’s income. However, not all states have adopted this tax position. For example, while California generally conforms to federal tax law for laws enacted through January 1, 2009, California has not yet conformed to this tax position. California Assembly Bill 1178 proposed to amend California tax laws to address this issue but has not been passed. Thus, until California conforms to federal tax law, California employers are in the unenviable position of including the value of coverage for adult children who do not meet tax dependent status in the employee’s income for state tax purposes but not federal tax purposes. Essentially, this is the reverse situation from what California employers must do with respect to domestic partner coverage. Employers in California (and other states that have not conformed to the federal rules) should check to make sure they are properly addressing this tax issue.