On Thursday, May 21, 2009, legislation was introduced in Congress to remedy the tax inequity incurred by employees who receive a domestic partner benefit.
The legislation called the Tax Equity for Health Plan Beneficiaries Act of 2009 (H.R. 2625 and S. 1153) was introduced by Rep. Jim McDermott (D-WA) in the House and Sen. Chuck Schumer (D-NY) in the Senate.
The bill is intended to rectify an inequity in the way employer-sponsored health benefits are taxed when those benefits are extended to domestic partners and other non-spouse, non-dependent beneficiaries.
Currently, the Internal Revenue Code excludes from income the value of employer-provided benefits received by employees for coverage of a spouse and dependents. However, the Tax Code does not extend this treatment to coverage of domestic partners or other persons who do not qualify as a spouse or dependent (such as certain grown children living at home who are covered under a parent’s plan or certain children who receive coverage through a grandparent or parent’s domestic partner).
This legislation would end the federal tax inequities for employer-sponsored health coverage provided to domestic partners and other non-spouse, non-dependent beneficiaries, by doing the following:
- Excludes Employer-Provided Health Insurance From Taxation
The value of employer-provided health insurance for an employee’s domestic partner or other non-dependent, non-spouse beneficiary would be excludible from the employee’s income if such individual is an eligible beneficiary under the plan.
- Makes Self-Employed Health Premiums Deductable
The cost of health coverage for domestic partners or other non-spouse, non-dependent beneficiaries of self-employed individuals (e.g., small business owners) would be deductible to the self-employed person.
- Creates Pre-Tax Cafeteria Plan Elections
The legislation would make clear that employees paying for health coverage on a pre-tax basis through a cafeteria plan would be able to do so with respect to coverage for a domestic partner or other non-spouse, non-dependent beneficiary.
- Ensures Voluntary Employees’ Beneficiary Associations (VEBAs)’s Tax Exempt Status
Many employers, particularly in the collectively bargained context, use tax-exempt VEBAs to provide health coverage. Today, VEBAs are prohibited from providing more than de minimis benefits to a domestic partner or other non-spouse, non-dependent beneficiary. The legislation would permit a VEBA to provide full benefits to non-spouse, non-dependent beneficiaries without endangering its tax-exempt status.
- Utilizes Health-Related Savings Accounts
In contrast to current law, employees would be permitted to reimburse medical expenses of a domestic partner or other non-spouse, non-dependent beneficiary from a health reimbursement arrangement (“HRA”), health flexible spending arrangement (“Health FSA”), or a health savings account (“HSA").
- Makes Payroll Tax Improvements
The value of employer-provided health coverage for a domestic partner or other non-dependent, non-spouse beneficiary would be excluded from the employee’s wages for purposes of determining the employee’s and employer’s FICA and FUTA payroll tax obligations.
SHRM supports the Tax Equity for Health Plan Beneficiaries Act of 2009. SHRM, along with more than 50 other organizations, have formed the Business Coalition for Benefits Tax Equity to lobby for the enactment of this legislation.