Domestic Partners

[Guest tas1]

I have tried to research the current rules about domestic partners and keep coming across conflicting information. The client believes that a participant's domestic partner can be reimbursed for medical expenses out of the participant's FSA account based on the following FAQ from the IRS website:

"A town has a cafeteria plan which offers health care benefits to domestic partners. Does a domestic partner and his or her child qualify to be covered under the health plan?

Cafeteria plans can offer health insurance to employees, their spouses and their dependents. The domestic partner and dependents in this case may not be participants in a cafeteria plan because they are not employees, but the plan may provide benefits to them. For example, a domestic partner may not be given the opportunity to select or purchase benefits offered by the plan, but the domestic partner may benefit from the employee’s selection of family medical insurance coverage or of coverage under a dependent care assistance program."

However, I have read other articles which said that any benefits paid to the dp must be taken from after-tax employee compensation (which makes the FSA reimbursement pretty pointless). I have read that the plan can reimburse the employee for these expenses if the dp meets the definition of a "qualifying relative" (the document points to 152 definition for dependents). Then read something that seemed to indicate that the compensation limit in the definition of "qualifying relative" does not apply - which would really make it is for many dp's to be considered dependents it would seem to me.

The document has this for the definition of dependent "an individual who is a dependent within the meaning of 152(a) without regard to 152(b)(1), 152(b)(2) and (d)(1)(B) thereof of the Code of a Participant or a former Participant in the Plan"

I greatly appreciate any clarification on this issue. Thank you!

[GBurns]

Notice that in everything that you have referenced, the reimbursment is to the employee. You will find nothing that says "to the domestic partner' and I do not recall anything that says "to the dependent" either.

Rembursement is to the participating employee and/or accepted assigns (which are usually service providers).

From memory, reimbursement is for the eligible expenses of the employee incurred for the medical care of the employee, spouse and eligible dependents. I do not recall the IRS definition of an eligible dependent including domestic partners, but see section 152.

[Jacmo]

If I recall correctly, there are several different definitions available for "dependent", which may or may not include domestic partners. The employer usually has the choice, in the plan design (via the plan document), to determine the definition of dependent.

[J Simmons]

If I recall correctly, there are several different definitions available for "dependent", which may or may not include domestic partners. The employer usually has the choice, in the plan design (via the plan document), to determine the definition of dependent.

For tax free treatment of the dollars run through the health flex account, you'd want to limit it to the definition of dependent "as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof). Any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of this subsection." IRC § 105(b).

Also, see Prop Treas Reg § 1.125-1(a)(4) for definition of dependent for cafeteria plan purposes. If you go beyond that definition in order to pick up domestic partners, you might run afoul of the requirement that the cafeteria plan be for employees.

[LRDG]

The US/federal tax code does not recognize domestic partners for income tax purposes. The US tax code does recognize individual tax payers, their legal spouses as described by state law, and dependents as described in sec. 152.

Dependents are bioligical child/ren of the tax payer, adopted child/ren of the tax payer, step child/ren, or dependents under majority age, to whom the tax payer contributes toward the care of child/ren's financial support; these childr/en may be grandchild/ren raised by the grandparents with legal custody, foster child/ren, etc., fully described in sec. 152.

A medical insurance plan, governed by state insurance law, may allow insurance coverage for domestic partners and dependents.

Pre-tax payment of premiums or other eligible expenses for the domensic partner is not permitted by United States income tax law, including Sec. 125 of the US income tax code, written and enforced by the Federal Government, not to be confused with what may be allowed by State Insurance law, or State Income Tax law.

There exists some ambiguity because the US tax code refers to a legal spouse as one 'described by state law', and I think we have states that recognize domestic partnerships. We also have state insurance law now allowing coverage of domestic partners and dependents. (Also consider common law marriage in those states that do, do not or may no longer recognize common law marriage/spouse)

But until the federal tax code is amended to describe and recognize domestic partners or further describes spouse more faborably with respect to DPs, there is no provision for taking a tax deduction or a payment for pre tax benefits through a Sec. 125 plan for a domestic partner, or the dependent/s of a domestic partner who do not otherwise meet Sec. 152.

A Sec. 125 plan can't permit expenses pre-tax for a domestic partner or dependents of DP not meeting Sec. 152, even if a state insurance law allows DP and their dependent/s, coverage, and even if state income tax law provides for tax deduction for DP expenses, the IRS does not at this time.

[Guest LMPett]

2007 proposed caf plan regs allow for pre-tax reductions for non-IRS dependents AS LONG AS the full fair-market value of coverage for the non-dependent is taxed to the employee.

So health plan contributions can be made pre-tax for employee/domestic partner, but the employee will have imputed income for the value of the DP added to his taxable income.

(Previously, the contribution for the DP had to be made after-tax and then the fair market value was reduced by the after-tax contribution. Same net result to employee in terms of contribution amt and taxation.)

Many health plans offer eligibility to domestic partners today but the tax code only gives tax advantages to spouses and IRS Section 152 dependents.

So no FSA OR HSA benefits to DPs either, unless they qualify as a Section 152 dependent.