The IRS recently released two information letters addressing the federal tax treatment of employer-provided health coverage for employees’ children and domestic partners. Highlights can be found below.

  • Employers can exclude from taxable income the employer-provided health coverage for the employee, the employee’s spouse, the employee’s tax dependents, or any child of the employee who has not reached age 27 as of the end of the taxable year. 
  • A domestic partner is not considered a spouse for purposes of the federal tax exclusion.
  • Employer may exclude a domestic partner’s health insurance coverage from an employee’s income if the domestic partner qualifies as the employee’s tax dependent under Internal Revenue Code Section 152.
    • Generally, to qualify as a tax dependent the domestic partner must:
      • Not be a qualifying child of any taxpayer.
      • Be a citizen, national or legal resident of the United States or a resident of a contiguous country.
      • Be a member of the employee’s household for the full tax year.
      • Receive more than half of his or her support from the employee.
        • This last prong usually results in the failure of a registered domestic partner to be a tax dependent unless the registered domestic partner is not working AND does not reside in a community property state.
  • Unless the employee has adopted the domestic partner’s child or is considered a stepparent under state law, a domestic partner’s child is unlikely to meet the requirements for tax-free health coverage.

Next Steps

  • Employers in states with domestic partner laws should be aware of the tax treatment requirements and comply accordingly. Be aware, federal and state treatment may differ depending on your state’s tax and domestic partner laws. 
  • Contact your tax professional should you have any questions regarding tax treatment of certain employees’ coverage.
  • For complete details, see: Letter 2016-0008 and Letter 2016-0012.