Do health-reimbursement plans provide domestic-partner coverage?

[Peter Gulia]

Do health-reimbursement plans provide domestic-partner coverage?

Imagine this not-so-hypothetical situation.  An employer sponsors a health plan of the kind people call an “HRA” or health-reimbursement-arrangement plan.  There is no participant contribution.  Claims for reimbursement of a medical expense are paid by the employer from its assets.  Presume the employer intends the plan to fit Internal Revenue Code § 105(b) and the Revenue Rulings interpreting § 105(b) regarding an HRA.

The employer knows same-sex couples have no less right to marry than opposite-sex couples.  But the employer, for its own business reasons, wants to provide its HRA benefit regarding the medical expenses of an employee’s non-spouse civil-union or domestic partner [26 C.F.R. § 301.7701-18(c)] equally to those of an employee’s spouse.  The employer wants to provide this even if there is no support for treating an employee’s domestic partner as the employee’s spouse, dependent, or child.

1.    Do plan-document vendors set up providing HRA coverage for a domestic partner as a check-the-box choice?

2.    If it is a document choice, what (if anything) does a vendor explain about the Federal tax law implications of providing that the employer will reimburse the medical expenses of an employee’s non-spouse?

3.    If an employer provides domestic-partner coverage, what methods does it use to add an amount for the value of the coverage, or of the reimbursements, to an employee’s wages for W-2 tax-reporting and withholding wage and income taxes?

[Peter Gulia]

About #3, perhaps Brian Gilmore has seen what some employers are doing?

[Brian Gilmore]

It's a good question that comes up quite a bit. I posted some thoughts about the options on slide 31 here: 2022 Newfront Health Benefits for Domestic Partners Guide.

With standard health coverage, all employers use some metric of the FMV of the cost of coverage (incremental approach or COBRA rate) for non-tax dependent DPs.  That makes sense because the value of the benefit may far exceed the cost of coverage.

That approach isn't as well suited for defined contribution arrangements like an HRA because that cost of benefits will never exceed  the cost of coverage.  So it's far better to have the benefits (reimbursements) taxable for the non-tax dependent DP with respect to an HRA.

I haven't been able to fine any clear guidance supporting that taxable reimbursement approach, outside of the standard §104 and §105 principles for accident or health insurance.  But the IRS goes hint at it in PLR 201415011.  Regardless, that approach is definitely the industry norm, so I don't see it as being aggressive at this point.

 

[Peter Gulia]

Brian Gilmore, thank you for your always helpful information.

In December (after I posted), my client and its client (neither of which is the employer) readily observed that the tax consequences and penalties the Internal Revenue Service and the State’s tax authority could impose on the employer if it lacked reasonable cause for its tax-reporting and tax-withholding positions would be less than the expense anyone would incur to get a lawyer’s or certified public accountant’s advice to support reasonable-cause relief at even the lowest level of confidence. (And that’s without counting any expense for editing the HRA’s written plan.)

Thank you for your information about a custom.