From defining who is a domestic partner, to the taxation of their health benefits, domestic partners pose unique challenges for employers who choose to offer coverage for them as part of their health plans.
What’s in a Name?
First, what is a domestic partner? It depends. In the days before the Windsor and Obergefell Supreme Court decisions legalizing same-sex marriage, domestic partners were a creation of the states, and some employers, as a way to recognize same-sex relationships with something akin to marriage. Several states chose to allow individuals to enter into lawful domestic partnerships or civil unions that provided the parties with rights similar to those enjoyed by married couples. This sometimes included benefits eligibility.
However, not all states had these statutes on the books. In response, some employers began to offer health coverage even where the domestic partnership wasn’t recognized by law. In these instances, the employer or insurance carrier would define domestic partnership.
In the wake of the Supreme Court same-sex marriage decisions, some plans stopped providing domestic partner coverage on the theory that same-sex couples could now become married. In other cases, domestic partner coverage was retained to cover non-married, same-sex relationships. Additionally, while not required to, some employers expanded the concept to include non-married opposite-sex relationships. For plans that retained domestic partner coverage (or expanded it), the plans would establish standards for determining if someone was a domestic partner, unless state law required a particular definition. As a result, there is not a uniform standard across the country.
HUB Point: As a best practice, plans offering domestic partner coverage are encouraged to require completion of a Domestic Partner Affidavit. In the Affidavit, the employee and domestic partner attest that certain requirements for domestic partnership under the plan, such as cohabitation, are satisfied. They may also be asked to provide evidence of a common address. These affidavits can typically be obtained from your insurance carrier or third-party administrator. However, care should be taken to make sure they comply with any applicable state law.
Domestic partner taxation benefits are perhaps the biggest challenge employers face in offering this coverage. The federal tax code allows employees to pay for benefits for themselves, their spouses and dependent children using pre-tax dollars. Likewise, the tax code excludes from their income the employer paid portion of benefits for the employee, spouse, and dependent children.
On the other hand, domestic partners (and the dependent child(ren) of a domestic partner), whether lawful or not, are not usually provided with favorable federal tax treatment. In some cases, it may be possible to get favorable tax treatment if the domestic partner (or the domestic partner’s child) happens to qualify as a tax dependent of the employee. However, this is not typically available.
For employers, this means additional steps must be taken to ensure proper federal tax treatment. Since employees aren’t permitted to pay for benefits for most domestic partners (and their children) with pre-tax dollars, the portion of the premium attributable to the domestic partner (or their child) must be paid post-tax. For example, an employee may pay $150 per month pre-tax for employee-only coverage, or $250 per month pre-tax for employee plus spouse, but they would pay $150 pre-tax and $100 post-tax if they cover themselves and a domestic partner.
In that case, the employer paid portion of the benefits must also be treated as taxable to the employee. This imputed income is a bit more challenging and there is no explicit IRS guidance on how to determine the amount. Some employers use the COBRA premium for individual coverage (minus the 2% administrative fee) as the value of domestic partner coverage.
Others may look to the difference in cost between the level of coverage including the domestic partner and the level of coverage not including them. For example, if an employee goes from single to family coverage by adding a domestic partner, the “value” of the domestic partner coverage is the family coverage premium, minus the single coverage premium. This approach can yield some odd results, however.
For example, for an employer with only single and family coverage options and nothing in between, the value of the domestic partner coverage may be greater than single coverage. This is because the family premium likely prices in the potential for multiple dependents, not just one. Therefore, the additional cost of adding a domestic partner may be more than the cost of self-only coverage.
On the other hand, an employee with multiple children who are tax dependents might have family coverage anyway. If that employee then adds a domestic partner, there would be no additional incremental premium. That would mean the “value” of the domestic partner coverage is $0. However, it seems unlikely the IRS would accept that argument.
Additionally, state tax treatment can vary.
HUB Point: Given the complexity and uncertainty around the taxation of domestic partner coverage, employers should also consult with their tax advisors to determine the best approach for valuing domestic partner coverage. They should also consult with their payroll providers to ensure their systems are set up to correctly account for benefits provided to domestic partners.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.