Domestic partner - can we reimburse medical expenses under our flex plan?

[Guest RedShoes]

We allow employees to cover their domestic partner and domestic partner's dependents under our health and dental plans. IRS requires that we tax the employee for the portion of the premiums that cover the domestic partner and their dependents. Does the IRS set any other limitations on domestic partner status?

For example, an employee just submitted a claim for reimbursement under our flex plan. The claim is for an expense incurred by the domestic partner who is covered on our health and dental plans. Are we permitted to reimburse for this expense?

[oriecat]

Not unless the qualify as a dependent under the tax code.

[david rigby]

State tax laws may vary.

[Guest LisaAZ]

I don't think it matters which state regs apply. The FSA is regulated by the IRS, and the IRS doesn't recognize domestic parnters (unless they're considered legal dependents).

[jstorch]

The Defense of Marriage Act, Pub. L. No. 104-199, Sept. 21, 1996, overrides state law for federal purposes. Spouses for federal tax Code (& other federal purposes) must be 1 man/1 woman.

I agree, domestic partner would have to be a dependent to qualify for flex plan coverage.

[david rigby]

To the best of my knowledge, ERISA does not override state laws that determine income subject to state taxation.

[Guest b2kates]

ERISA does not govern state tax treatment, but the issue on FSA is whether the domestic partner is the dependent of the participant and that is determined by Internal Revenue Code Section 151 or 152 - not state tax law.

[Guest RedShoes]

OK. Now I'm in a real pickle. I discovered that while I was out on maternity leave, my fill-in reimbursed this employee for expenses that her domestic partner incurred. To complicate things even further, the majority of these claims were submitted and reimbursed in the 2003 tax year.

Is there a way for me to rectify this? I don't want my employee to get in trouble with the IRS, nor my company!

I'm not a payroll expert.... But here's a thought: Could I ask her to pay us back for the expenses that we reimbursed, add that dollar amount back into her income and tax it appropriately? Or, could I just tax her on the value of the reimbursements we paid to her?

[Guest prattam]

I'm assuming that your company's flex-plan is a Section 125 cafeteria plan. The only persons eligible for reimbursement are the participant (eligible employee), his/her spouse, and his/her dependents(s). An employee is not permitted to pay for domestic partner coverage with pre-tax salary reductions unless the domestic partner is a dependent (as defined under Code Section 152). So, in the case you're describing, if the domestic partner is not a qualified dependent, the employee cannot be reimbursed for medical expenses incurred by the domestic partner.

[Guest prattam]

In response to your second post, your company should consult with legal counsel. There are serious tax consequences and potential liability to the plan; and you don't want to do any more to add to the seriousness of the situation by asking the employee to pay the monies back. Contact the company attorney immediately!