Domestic Partner Taxation

[Guest benefitsanalyst]

We have an employee who has family coverage (he covers himself and 3 children) and now wants to add a domestic partner. Would there be any after tax cost and imputed income on covering this DP since he is already at the family coverage tier. There is no other tier available.

[MARYMM]

We have an employee who has family coverage (he covers himself and 3 children) and now wants to add a domestic partner. Would there be any after tax cost and imputed income on covering this DP since he is already at the family coverage tier. There is no other tier available.

For Federal tax purposes, the fair market value of the coverage provided to the DP would be taxable income for the employee. State taxes would depend on state tax laws.

[Guest Sieve]

. . . unless the domestic partner is a dependent under IRC Section 152. (See IRC Section 105(b) & Section 152(f)(3).)

[jpod]

Assuming this is an insured plan, is it clear that adding the DP would require imputation of income even though the 3rd party premium is not going up? There may IRS guidance that says so, I just don't remember.

[MARYMM]

Assuming this is an insured plan, is it clear that adding the DP would require imputation of income even though the 3rd party premium is not going up? There may IRS guidance that says so, I just don't remember.

Its the fair market value of the coverage that is taxable, not the incremental cost. As I understand it, the IRS has not issued guidance on how to value it. We had to deal with this issue last year when we had to impute income for covering overage dependents. Some suggestions rec'd from our counsel were to use the single premium or the single COBRA premium.

[Guest benefitsanalyst]

Does this change for a self-insured plan?

[Guest JKosciusko]

The domestic partner issue is handled the same whether a plan is insured or self-insured. Self-insured plans are exempt from state regulations but subject to ERISA and federal regulations. The tax on domestic partner benefits is a federal issue and therefore overrides the insured/self-insured condition. As far as fair market value, many are using (so I've heard...not seen <caveat>) the single rate.