By Thompson Publishing Group
For same-sex domestic partner coverage, experts urge U.S. employers to consider charging participants on an after-tax basis and to impute income for the employer-provided portion. This can involve a tricky process of separating taxable from tax-free premium payments.
Federal law does not recognize domestic partners as dependents unless they meet Internal Revenue Code section 152's definition of dependent. Generally, a dependent under federal law is a qualifying child or other relative, primarily brother, sister, stepbrother, stepsister, father or mother.
The fact that domestic partners do not qualify as dependents under federal law means that the value of any health coverage an employer provides to an employee's domestic partner cannot be excluded from the employee's income and is treated as income for the employee, subject to federal income taxes and employment (Social Security, Medicare and unemployment) taxes.
To do this, the fair market value (FMV) of health, dental and vision coverage provided to an employee's domestic partner is included in the employee's income as imputed income. For an employee to be taxed on that coverage, the employer must determine the FMV of that coverage. And that depends on the cost of the coverage.
Since imputed income that results from domestic partner coverage is considered to be wages to the employee, it must be reported on the employee's Form W-2. And the employer has to withhold for FICA, FUTA, Medicare and federal income taxes on the benefits' value.
• If the coverage is for the employee and his or her domestic partner, then the FMV is the difference between the amount the employer would contribute for the employee's coverage alone and contributes for both the employee and the partner, minus the amount the employee contributes for coverage after taxes are imposed.
• If the coverage is for an employee, an employee's children and the employee's domestic partner, then the cost is the difference between the amount the employer (a) would contribute for coverage of the employee and the employee's children (assuming that they are qualified dependents of the employee) and (b) contributes for the employee, the employee's children and the partner, minus the amount the employee contributes for coverage after taxes are imposed.
Contributed by Thompson Publishing Group Inc. Republished with permission 2010. All Rights Reserved. For more information on providing benefits for domestic partners, see Domestic Partner Benefits: An Employer's Guide, published by Thompson Publishing Group.
9th Circuit: Back Pay Remedy Awarded to Same-Sex Partner, SHRM Online Legal Issues, December 2009