How to handle employee and employer contributions for same sex marriages

[Guest Jet352]

Greetings from Massachusetts, where we have received our first inquiry regarding benefit enrollment for a family with a same sex marriage. We are busily trying to figure out how to set up our payroll system to handle the pre/post tax issues of employee contributions and the gross income issue of employer contribution.

Would greatly appreciate any guidance!

[oriecat]

Can you give the specifics of the plan?

Total premium

Employer contribution

Employee contribution

Probably need for both the family plan (or ee & sp if thats what they have) and the employee only?

[QDROphile]

Nothing has changed for federal tax puposes. The marriage is irrelevant. Federal law does not recognize the marriage. The same sex spouse might be a dependent. Code section 152 has been rewritten and that has made a few changes, but not on the fundamental questions about dependency of unrelated persons. At least the relationship won't violate local law!

[jsb]

I would agree with QDRO.

For federal purposes, premiums paid by the employee must be post tax. Also, value of premium paid by employer on behalf of same sex spouse must be imputed as income to the employee unless dependency established. Same thing for incoming kids unless other federally recognized process (eg. adoption) occurs to establish legal link between employee the "step" kids.

Look to state law for relevant state taxability issues.

[Guest Jet352]

The plan has three tiers.

as a sample only:

Indiv. Total = 355 per month EE contribution= 50/month ER contribution = 305

Indiv + 1 Total = 575 per month EE contribution = 200/month ER = 375

Family Total = 975 EE contribution = 400/month ER= 575

If the ee elects family, then how would we assign a value for the spouse's portion of the benefit for both pre/post tax ee contribution and also for the value of the er's contribution.

[oriecat]

I'm going to assume that the family includes the ee's own children (so no question about their nontaxable dependent status) plus the same sex spouse.

If you used the amounts from EE+1, that would make a $70 ER contribution to be imputed, and premiums of $50 pretax and $150 aftertax. The reason I use those amounts is because if you then add the kids on, they should be nontaxable, so they shouldn't affect it. But I am sure it can be argued different ways.

I think that's how I would do it though (but I don't claim to be an expert or anything!)

[Guest Jet352]

That's what we were thinking but when I was doing more research into things, I found one firm that claimed that since the spouse's benefit was that of a single coverage, then all the calculations would need to be based on the single coverage. (even though spouse puts the plan into the family level)

That just doesn't sound right to me.

[Lori Friedman]

Jet352,

You might find it helpful to read P.L.R. 200108010, which provides a lengthy discussion and a list of rulings about the federal tax consequences (both payroll tax and income tax) of benefits provided to an employee's domestic partner and the domestic partner's dependents.

[Harwood]

http://benefitslink.com/articles/mass-tir-04-17.txt

http://www.mintz.com/images/dyn/publicatio...ory-8-23-04.pdf

http://www.mintz.com/images/dyn/publicatio...dvisory-804.pdf

http://www.kl.com/files/tbl_s48News/PDFUpl...403/ela0504.pdf

[Guest Jet352]

Thanks, lots of reading but I think these help!

[Kirk Maldonado]

There is one issue that has always troubled me about this topic. I'm not aware of any specific guidance on this point, so if anybody does, please post it.

The issue is whether there is any imputed income to the employee because of the addition of a domestic partner (or someone in a similar cateogory) where the employee had already elected family coverage, so that the premium does not increase as a result of adding the additional person.

The official guidance seems to indicate that there would be imputed income, but that makes no sense because there is no increase in the premium. On the other hand, it seems somewhat illogical for the taxation of the coverage provided to the additional person to vary, depending on the coverage previously elected by the employee.

[GBurns]

Remember that there are 2 different factors in the issue. The premium and the benefit.

Premiums paid by either salary reduction (pre tax section 125) or by other employer contribution are a section 106 exclusion whereas the benefits received under a qualifying plan are excluded from the employee's gross income under section 105. This exclusion of the benefits is not enjoyed by domestic partners etc.

Even if the premium payment turns out to not have been affected because of the election of family coverage etc, the benefits received would not be excudible from gross income, hence the imputed income of the value of the benefits.

So it is the recieval of benefits that is the issue not the premium.

[Guest Jet352]

Is that why I find the case where one resource specifically states that the value of the spouse's plan really is the value of a single person coverage, regardless of what that does to the premiums for the employee's selection? So regardless of whether or not the election by the same sex spouse changes the actual cost of premiums to the employee, the value of the single plan needs to be carved out for tax purposes?

For those who have already gone through this and set up plan rules for their HRIS/Payroll systems to handle, how have you set up the deductions? Do you have a seperate "domestic partner/Spouse" carve out for their single coverage with an adjusted amount for the remaining ee and dependents so it really looks like two plans - one for the ee + dependents & the other for spouse/domestic partner?

So going with my example costs of employee/er premiums:

Indiv. Total = 355 per month EE contribution= 50/month ER contribution = 305

Indiv + 1 Total = 575 per month EE contribution = 200/month ER = 375

Family Total = 975 EE contribution = 400/month ER= 575

How would you break down the pre/post tax contributions and imputed income amounts?

[GBurns]

"How would you break down the pre/post tax contributions and imputed income amounts?"

You are asking about imputed income caused by the contributions to premium. That is not the main issue. The main issue is imputed income caused by the benefits recieved.

If the coverage is not employer provided and/or is paid for on a pre-tax basis, it is the benefits that are now includable in gross income. It is not the $400 premium that bothers me, it is the $70,000 hospital visit that becomes taxable income.

So it might be better to stop worrying about carving out the smaller premium and worry about the taxation of the larger benefits.

[Lori Friedman]

The issue is whether there is any imputed income to the employee because of the addition of a domestic partner (or someone in a similar cateogory) where the employee had already elected family coverage, so that the premium does not increase as a result of adding the additional person.

Kirk,

Yes, there will be imputed income. The employee is taxed on fair market value of the coverage for a nonspouse/nondependent -- the amount that an individual would have to pay for the same benefit in an arm's-length transaction, as determined by all of the relevant and objective facts and circumstances. The employer's cost to provide the benefit isn't determinative. [Regs. Secs. 1.61-21(b)(1) - (2)]

In P.L.R. 200108010, a provider used a reasonable estimate of the cost of providing coverage for the period of coverage for similarly situated beneficiaries, determined on an actuarial basis, under the COBRA premium rules of I.R.C. Sec. 4980B(f)(4)(b)(i). That approach was acceptable to the IRS.

By the way, hooray for Massachusetts, home of the Superbowl and World Series trophies, beautiful beaches, civil liberties, and individual rights and freedom.

[Guest Jet352]

Thanks all for contributing to this interesting discussion. GBurns, with Lori's comments and reading P.L.R. 200108010 I think I'm getting a better understanding about the task at hand.