Domestic Partner - Tax implications for health benefits

[French]

We will begin offering same-sex domestic partner benefits in January. We are working with our payroll department to set up the federal and state taxation. We only offer a 2 tier structure - individual and family. My understanding in general is that if an employee elects to cover a same-sex domestic partner who is not considered a tax-qualified dependent , the cost of coverage for that individual must be deducted on an after-tax basis. Is there any difference in the way we would set up the tax status if the employee already covered a biological child and therefore had family coverage and now choses to cover a same-sex domestic partner? I have not been able to find a lot of information about this.

[J Simmons]

If the inclusion of the domestic partner does not involve a cost of coverage increase over that for covering the employee and proper dependents for tax purposes, then there would be no part of that cost of coverage that would be taxable. Only an increase in the cost of coverage due to coverage for the domestic partner (or a dependent who does not qualify as such for health benefit tax purposes) needs to be deducted on an after-tax basis.

[jpod]

I'm not sure the answer is as clear as J Simmons suggests, but I certainly see the logic in it, so if IRS has not opined on the issue I would certainly follow his approach. If I have missed some IRS pronouncement on the issue, my bad.

[Peter Gulia]

The proposed regulations to interpret section 125 include an explanation: health coverage for a person other than the employee, his or her spouse, or his or her dependent “is includible in the employee’s gross income.” See Federal Register page 43951 (middle column). This isn’t really a proposed or new interpretation; the cafeteria-plan rule cites other regulations as already stating the point. The bit that’s an interpretation of section 125 is that an employee may elect health coverage as a taxable benefit.

The drafters said this much to have an answer for plans’ coverage of a former spouse or a same-sex spouse (if such a person isn’t a spouse for Federal income tax purposes). But the proposed rule sidesteps any explanation about how an employer decides the hypothetical “fair market value”.

Although a price attributable to a portion of coverage (or differences in coverage) might be some evidence concerning the value of that coverage, it isn’t necessarily the measure of that value.

One imagines that the Internal Revenue Service shouldn’t be too exacting about an employer’s method for estimating a hypothetical value. Instead, the IRS should recognize a good-faith effort. And the IRS might expect much less from a small employer that has only one or two employees with taxable-health-coverage wages than from a large employer that could have thousands of employees with such wages.

But it seems strange to suggest that the value of group health coverage on any human being is zero. If so, why do so many divorcing people negotiate it, and why do people in same-sex couples ask their employers for it?

Perhaps this bulletin board can be a forum for practitioners’ experiences about what employers are doing.

E7_14827.pdf

[QDROphile]

The IRS position on the issue is that the cost of coverage does not matter. The value of employer provided coverage is taxable even if there is no marginal increase in premium for the coverage. Unless the employee covers the value with an after-tax premium payment, the employee wil have taxable income.