Employee misled re: marital status on health enrollment forms

[WalkingAssets]

Here in California, just discovered yesterday that an employee has been misrepresenting that his domestic partner was his spouse on his health insurance enrollment forms for the last four years. Found out because he just told me he was about to get married later this month! I don't believe it was malicious, he's just really clueless about this stuff.

Anyway, I don't believe she is a registered domestic partner (that would be uncharacteristic of him, although I could be wrong). Her premiums have been paid pre-tax through payroll deferrals and she also used his HRA last plan year. Regardless of whether or not she is registered, I know that the IRS does not generally allow pre-tax premium deferrals and HRA participation for domestic partners.

Any advice on what to do now? Go back and try to make four years of corrections or just move forward since they are about to get married in 3 weeks? 

And yes, going forward, we'll ask for marital status verification...

Thanks in advance!

[Peter Gulia]

That someone said “[I’m] about to get married” does not necessarily mean he did not already have a spouse. He might have colloquially said “get married” to refer to a ceremony, rather than making the legal status of spouses.

An employee-benefit plan’s administrator might want its lawyers’ advice about whether it might be unwise to ask this individual for proof not asked of others.

Consider that even a fleeting presence in a nation, state, or other jurisdiction that at the time recognized common-law marriage could have resulted in a couple’s marriage. What makes a common-law marriage is that each party must be legally capable of making a marriage contract and each must state one’s present agreement to assume the relationship of spouses. That statement need not be in writing, it can be oral.

Every US State recognizes as a marriage a common-law marriage made in a jurisdiction where such a marriage is legally recognized. For example, California Family Code § 308 states: “A marriage contracted outside this state that would be valid by laws of the jurisdiction in which the marriage was contracted is valid in California.”

Even a weekend or one-day trip can result in a marriage. For example, Tornese v. Tornese, 233 App. Div. 2d 316, 649 N.Y.S.2d 177, 1996 N.Y. App. Div. LEXIS 11623 (N.Y. App. Div. 1996) (“[O]n a weekend trip to Pennsylvania in 1976, [John] told [Helen], . . . , that their divorce about two months earlier had been a mistake, [Helen] agreed, and the parties decided that they were married.”).

WalkingAssets, I don’t suggest that the couple you describe are spouses; rather, I suggest you might not know that they’re not.

This is not advice to anyone.

[Artie M]

Also, if the domestic partner qualifies as a dependent/qualifying relative, the pre-tax/HRA issues would go away.  However, most DPs do not qualify as a dependent/qualifying relative of their partner.

If the domestic spouse is in fact a domestic spouse....

As with any issue, one alternative that is always available is to do nothing and go on.  In that case, the company and the employee assume the risk.  However, they should be aware that not only did the employee pay the DP's premiums on a pre-tax basis when it should have been on an after-tax basis, there also is likely to be income to the employee that was not imputed.  (You have not mentioned children of the DP so I assume there are none or none were covered under the employer's plan.).  Imputing income is complicated but the gist of it is that the fair market value of the coverage(s) provided to the DP must be imputed to the employee. 

Employers usually use one of three methods to impute health plan benefit income:  (1) the COBRA rate for employee-only coverage; (2) the incremental cost or the additional cost of adding an individual to the coverage (e.g. the difference in cost between employee-only coverage and employee + 1 coverage, etc.).   This cost is not just the employee's cost of adding the CP but the portion of any amount the employer contributes for the employee + DP coverage attributable to the DP coverage.   (Note an insured plan with no incremental cost c/would use the employee only rate because, under the IRS's view, the incremental cost can never be zero); and (3) the actuarial value as determined by an actuary based on actual plan costs, demographics, etc.  If the employee paid for the group health plan coverage on an after-tax basis that amount would reduce the imputed income.... but if paid on a pre-tax basis it would not reduce the imputed income. 

Under your facts, imputed income should be only at the federal level because IIRC California does not have imputed income for DP coverage (but confirm because I do not work in California and it would be imputed for many states with income taxes).  Employers must report imputed income on the employee's IRS Form W-2 and failure to do so may result in penalties and interest charges for both the employer and employee.  Also, higher taxable income for the employee may also have other effects such as reducing eligibility for tax credits (e.g., Earned Income Credit) or increase the phase-out of itemized deductions.

The IRS has provided almost no guidance on how to impute income for HRA coverage provided to a DP.  Here, the fair market value of the HRA benefit is the amount that an individual would have to pay for the benefit in an arm's-length transaction. Arguably, the full value of the HRA (the COBRA rate) must be imputed regardless of utilization; however, many employers impute only the value of reimbursements provided to the DP.

 

 

[Brian Gilmore]

I would recommend correcting the tax situation for 2025 retro to 1/1 by recharacterizing the employee-share of the premium as after-tax, imputing income for the employer portion for the DP's coverage, and making any HRA reimbursements for the DP taxable.  The employer had no reason to know of the issue for prior years at the time, so I would leave that as is--perhaps noting that it could be considered an individual income tax issue to address with the personal tax adviser.   

More details:

• https://www.newfront.com/blog/imputed-income-for-domestic-partner-health-coverage

• 2025 Newfront Health Benefits for Domestic Partners Guide

[WalkingAssets]

Thank you to each of you for your responses! Each was useful and I appreciate your time.