Domestic Partners and Medical Insurance Premium

[mroberts]

Is premium paid for medical insurance on domestic partners able to be deducted on a pre-tax basis under Section 125? For example, let's say an employer's medical plan has rates of $200 for single coverage and $500 for family coverage. If an employee has a domestic partner and is required to pay 100% of the cost for dependent coverage, is the $300 able to be deducted pre-tax?

If not, what do most employers do to handle this situation?

[papogi]

Here are some excerpts I found while looking into this issue earlier:

To date, the IRS has not equated a same-sex domestic partner with that of a spouse, although the IRS has recognized that a domestic partner may be a dependent for tax purposes.

If a domestic partner is a dependent, domestic partner benefits may be considered non-taxable. See IRC § 152 (dependent defined as person who resides in the employee’s household and who receives at least 50% of support from employee).

If an employee's domestic partner is not the employee's dependent, an employee must pay premiums for domestic partner coverage with after-tax dollars, and any employer-paid premium for such coverage will constitute taxable income for the employee (and be subject to employment taxes).

Employees have asked their companies to offer health benefits to their domestic partners, and many companies have agreed. But while approximately 3,500 U.S.-based companies now offer benefits to cohabiting domestic partners, employees should be aware that those extra benefits might be considered taxable income.

Company-paid health benefits for the employee and the employee's spouse and dependents are not taxable income. But because the federal government does not consider a domestic partner to be a spouse, the difference between what the employer pays for a partner's benefits and what comes out of the employee's paycheck on the partner's behalf is taxable income.

Your employer will report that extra income for your partner's benefits on your Form W-2 -- Wage and Tax Statement. Because that extra money comes through on your W-2, not only will you owe federal and possibly state taxes on that money, but FICA tax also will be withheld.

There may be some options to help lessen your state tax bill. If your partner qualifies as your dependent or is recognized under state law as your spouse, then those medical benefits may be state tax-free. Your domestic partner qualifies as a dependent only if you provide more than one-half of that person's support for the year. In addition, that person must reside at your home and be a member of the household.

There's a quirk in the tax law that says that even if your partner meets the other dependency tests, he or she won't be considered a member of your household if your "relationship" isn't recognized under the law. That's why this won't work on the federal front: Uncle Sam does not recognize same-sex marriages. According to the 1996 Defense of Marriage Act, the word "marriage" means a legal union between one man and one woman as husband and wife, and the word "spouse" refers only to a person of the opposite sex who is a husband or a wife. Thus, a taxpayer and a same-sex domestic partner aren't married for federal tax purposes. So this won't help you on the federal level. But you may be able to avoid paying state taxes on those benefits if your state recognizes your union.

[Kirk Maldonado]

Income and employment tax withholding is required with respect to the imputed income recognized as a result of providing health coverage benefits to domestic partners. IRS Private Letter Ruling 9850011.

[mroberts]

How would you treat a situation where an employee is already at employee + family coverage and then adds a domestic partner? Would something be taxable here? The addition of this dependent wouldn't increase the premium, so is it safe to say that the employee and employer would not have to worry about imputed income in this situation?

[papogi]

Nothing should be taxable in that case.

[Guest Kat]

RE: employee + family and then add domestic partner

What happens if employee and domestic partner and domestic partner's dependent are covered for employee + family premium. Then later, employee adds his own dependents. Does this change the answer? Would the employee first be taxed on the employer contributions for the domestic partner and the domestic partner's dependent and thus get no exclusion for his (employee's) own dependents? Or would employee get the exclusion for his own dependents and thus have no taxes to pay for the domestic partner and the domestic partner's dependent?

ADDITIONAL ISSUE: If some how the domestic partner could be added without the employee having to pay tax on the employer’s contribution, would the employee have to pay tax on the benefits paid out by the insurance for the domestic partners health bills?

[papogi]

Concerning your first situation, my take is that the employee's payroll deductions for family coverage would then have to be taken pre-tax. Since the employee has dependents that would make pre-tax deductions allowed, I don't see that the employer could legally force the employee to make post-tax deductions simply because it was the domestic partner and dependents that came on before the employee's own dependents. The pre-tax deductions should begin as of the addition of the employee's own dependents.

As for the second situation, if a domestic partner is a dependent under Section 152 and can be added to the employer's plan without incurring any post-tax deductions (e.g., the employee already had family coverage, and the employer is not incurring any greater premium with the addition of the domestic partner), the employee would not have to pay tax on the benefits paid from the plan.

[mbozek]

P: MY research in estate planning indicates that no state law equates domestic partners with married couples under state law. The closest thing to marriage is in VT which recognizes civil union for certain property inheritance purposes but stops short of recognizing marriage between same sex couples. Anyway under the Defense of Marriage act, signed by the great liberal Bill Clinton, another state does not have to recognize the civil union. I would be intersted in any state that recognizes same sex couples as married for income tax/inheritance purposes ( HI comes to mind).

[papogi]

mbozek, I agree. The only way to make the benefit tax-free (both the contributions to the plan as well as the benefits paid from the plan) is if the domestic partner is a dependent under Section 152.