Guest Article

(From the October 13, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS PLR Confirms Employer Can Rely on Employee's Certification that Domestic Partner Is a Dependent

A recent IRS private letter ruling outlines a certification process employers can use to determine whether health benefits they provide to employees' domestic partners are subject to federal income and employment taxes. PLR 200339001 (June 13, 2003).

Background

Most employer-sponsored health benefit plans offer coverage to employees, their spouses, and their dependents. Employees generally do not pay income or employment taxes on the value of these employer-provided benefits. IRC section 106(a). Also, any benefit payments these plans make to or on behalf of covered employees, their spouses, and dependents, generally are not taxable. IRC section 105(b).

An increasing number of employers are extending health benefits to employees' domestic partners. (According to the Human Rights Campaign, more than 200 Fortune 500 companies now offer domestic partner benefits.) Employer-provided domestic partner benefits generally are subject to income and employment taxes unless the employee's domestic partner also is the employee's "dependent" under federal tax law. (Even though some jurisdictions recognize same-sex marriages, same-sex domestic partners cannot be treated as "spouses" for any purpose under federal law. The federal Defense of Marriage Act, P.L. 104-199 (September 21, 1996), specifies the term spouse, when used in any federal statute, "refers only to a person of the opposite sex who is a husband or wife.")

When Does a Domestic Partner Qualify as a Dependent?

The tax law uses a two-part test to determine if an employee's domestic partner is his or her dependent. The first part, the support test, is satisfied if the employee provides more than half of the domestic partner's support for the taxable year. The second part is satisfied if the domestic partner's principal place of abode is the employee's home, and the domestic partner is a member of the employee's household (i.e., the relationship test). IRC section 152(a). (Under IRC section 152(b)(5), the domestic partner relationship also must not violate local law.)

Summary of PLR 200339001

Employers generally would prefer not to pay employment taxes on the value of health benefits they provide to their employees' domestic partners. But out of respect for their employees' privacy, employers usually do not wish to ask employees for information about their financial and living arrangements.

In order to get around this problem, the employer that requested PLR 200339001 established a certification process for domestic partner benefits. Before enrolling a domestic partner for coverage under the employer's plan, and every year thereafter, the employee and domestic partner must certify that the domestic partner relationship is authentic and, if the employee is claiming the domestic partner as a dependent, certify that the IRC section 152 requirements are met. The initial certification must be in the form of a notarized Domestic Partner Affidavit.

According to the IRS, the employer can rely on this certification (and recertification) to decide whether benefits the employer provides to employees' domestic partners are subject to federal income and employment taxes because it includes representations that the IRC section 152 requirements are met.

If you have any questions or need additional information, please contact your Deloitte advisor.

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 questions or need additional information about this article, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Copyright 2003, Deloitte.