Guest Article

(From the November 1, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

FUTA Taxation of Domestic Partner's Health Coverage

A domestic partner who is a dependent of an employee under Code § 152 is also a dependent for purposes of the wage exclusion for employer-provided health coverage under the Federal Unemployment Tax Act (FUTA), a recent IRS Chief Counsel Advice concluded. Therefore, the value of the health coverage for the domestic partner is excluded from the employee's FUTA wages.

Dependent Is Not Limited to Listed Family Members

The Federal Insurance Contributions Act (FICA) and FUTA each provide that, for purpose of those taxes, wages do not include amounts that are paid to or on behalf of an "employee or any of his dependents" under an employer provided health plan. See Code §§ 3121(a)(2) and 3306(b)(2). The Treasury regulations further explain that, "Dependents of an employee include the employee's husband or wife, children, and any other members of the employee's immediate family." See Treasury Regulation §§ 31.3121(a)(2)-1(c) and 31.3306(b)(2)-1(c).

A recent Chief Counsel Advice, found on the IRS Web site at: www.irs.gov, addressed the question of whether, in light of the regulations, FICA and FUTA dependents were limited to the employee's wife, children and members of the employee's immediate family. Specifically at issue was whether employer-provided health coverage for an employee's domestic partner was excluded from the employee's wages for FUTA tax purposes.

The IRS advised that this issue was examined with the recent development of Notice 2010-38, which addressed the exclusion from gross income under Code § 105(b) (for employer-provided reimbursements for medical care for the employee, spouse or dependents) and Code § 106 (for coverage under an employer-provided health plan for the employee, spouse or dependents) following the enactment of the Patient Protection and Affordable Care Act. According to the Advice, at that time the IRS concluded that the FICA and FUTA regulations were worded to say that "dependents" "include" an employee's family members - but do not preclude the possibility that other individuals could also be dependents for purposes of the FICA and FUTA exclusions.

The Advice referenced Private Letter Ruling 200339001 which, although it may not be relied upon by taxpayers other than those addressed in the ruling, expanded the group of dependents under the FICA and FUTA regulations to include individuals who are dependents under Code § 152. It concluded that a domestic partner who is a dependent of an employee under Code § 152 is also a dependent for purposes of the FUTA wage exclusion.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.