Imputed Income from Domestic Partner Benefits

[Christine Roberts]

Employer sponsors 401(k) plan that uses W-2 definition of compensation.

Employer permits employees to extend group health and other insurance coverages to domestic partners, both "registered" domestic partners who have the same status as spouses under state law, and unregistered domestic partners (e.g., opposite sex) who have no special status under state law.

Presume 100% of all domestic partners receiving coverage DO NOT qualify as the employees' dependents under IRC Section 152.

For federal tax purposes, employer reports imputed income equal to the value of the coverage provided to the domestic partners, on the employees' Form W-2s, in boxes 1, 3, 5, and 12.

Will the "phantom" income be included in compensation for plan purposes unless the employer expressly excludes it from the definition of compensation in the plan document? Or is it a non-issue, in most instances, because salary deferrals and matching contributions are based on payroll period income and the imputed income from domestic partner benefits is only tracked for W-2 purposes on an annual basis, and not reflected payroll period to payroll period???

Have others had this issue come up?

[GMK]

I too would be interested to read some comments on imputed income.

I think compensation includes imputed income unless the Plan Document specifically excludes it. For example, 'included employer-provided health care coverage' is a part of 415 compensation.

Can you actually ignore imputed income if your deferrals and matches are per payroll (no true-up)?

This issue has not come up yet, but we hope to decide on this and some other compensation issues before they do come up.

[Guest Daphne]

I'd like to revive this topic, but with a slightly different angle.

We have a plan that uses the 3401(a) definition of compensation, and the issue of imputed income for domestic partner benefits has come up. The plan document is silent on the issue, and we're not finding anything specific in the Code as to whether this income is automatically part of 3401(a) compensation.

The plan sponsor does not want this income to be included for determining contributions. We can amend the compensation definition to exclude this, but our concern is whether the exclusion of this income results in a non-safe harbor definition of compensation that would have to be tested. If it's excluded from 3401(a) compensation already, then the exclusion won't cause any additional compensation testing issues.

Thanks in advance.

[EBECatty]

Curious whether there was any resolution of this issue?

[Peter Gulia]

Do prototype and volume-submitter documents made for the current cycle that ends April 2016 allow choices for this point?

[K2retire]

This is the sort of thing that has prompted us to encourage our clients to exclude taxable fringe benefits from the plan's definition of compensation.