The legalization of same-sex marriage nationwide has made it easier in some sense, for employers to administer the tax impact of health benefits provided to same-sex spouses of employees. What about employers who offer employer sponsored benefits to Domestic Partners? Do the same tax laws apply?
This newsletter letter is intended to provide an overview of the taxability of Domestic Partner benefits. For specific questions or scenarios, we encourage you to consult with your tax advisor or in-house counsel.
Due to the complexity of Domestic Partner benefits, many employers like to offer consistency by offering coverage to opposite-sex and same-sex couples. Some employers choose to offer coverage to the Domestic Partners’ child(ren) as well.
What is a Domestic Partnership?
There are no federal guidelines for domestic partnerships – meaning the federal government doesn’t recognize these relationships. Each state defines the partnerships differently. In most states that continue to offer it, a domestic partnership involves committed, unmarried couples, same or opposite sex, in a relationship that is like a marriage. Most domestic partners share a residence, finances, and many even raise children together as unmarried partners.
A couple typically achieves domestic partner status in one of two ways:
- Registers with a state or locally
- Meets your company’s policy for domestic partner status
An employee can self-certify by completing an affidavit. Insurance carriers typically defer to the employer to police whether the employee and partner meet the definition of Domestic Partner.
Registered Domestic Partners (RDPs) cannot file join federal returns, and the employee receiving benefits for a partner may have to pay federal income tax on the value of the benefit, known as “imputed income.”
Taxable Domestic Partner Benefits
When health coverage* is provided to a Domestic Partner (or to his or her child) who is not the employee’s Code §105(b) tax dependent, taxability depends on how coverage is paid for (pre-tax or after tax).
When coverage is paid with after-tax dollars for coverage of a domestic partner (or child), the coverage will not be taxable to the employee as long as the employee pays at least the Fair Market Value (FMV) of the coverage.
How to Determine the Fair Market Value of Coverage
There is no IRS guidance for computing the fair market value (FMV), but employers typically take one of two approaches:
- Use the self-only coverage COBRA rate, minus the 2% administrative fee, for coverage.
- Determine the Incremental Cost by calculating the difference between the self-only premium and the employee + one premium.
If an employer pays any portion for the Domestic Partner’s (or child’s) health coverage*, then the FMV of the health coverage* must be included in the employee’s income. The employee will have imputed income reported on form W-2 equal to the FMV of the Domestic Partner’s coverage. This amount will be subject to income tax withholding and employment taxes.
Unless an exclusion applies, compensation is generally taxable:
- The IRS considers health coverage* for a domestic partner a taxable fringe benefit that must be included in the employee’s gross income.
- The employee must receive imputed income for the employer-share of the premium paid for the domestic partner’s coverage. It is subject to withholding and payroll taxes and must be reported as income on the employee’s Form W-2 (similar to wages).
- The employer must determine the fair market value (FMV) of coverage.
Domestic Partner coverage can be tough to navigate. Consult with us if you would like to learn more about Domestic Partner benefits.
*If benefits are offered through a Section 125 Plan for pre-tax deductions of premium, all plans would be subject to the Domestic Partner Taxation rules: medical, dental, vision, etc.