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Tax "gross-up" seeks to eliminate tax inequity faced by employees with same-sex domestic partners or spouses
Banking giant Barclays announced in November 2010 that it will be joining the ranks of companies such as Google, Cisco, Discovery Channel and Kimpton Hotels in using tax "gross-ups" to reimburse U.S. employees whose health benefits for same-sex domestic partners or spouses are treated as taxable income by the U.S. Internal Revenue Service (IRS).
According to a New York Times report, other U.S. companies that intend to provide gross-ups for same-sex partner health benefits beginning in 2011 include Apple Computer and Facebook, along with a number of consulting and legal firms.
Tax gross-ups refers to the practice of employers making employees whole for additional taxes owed, thereby ensuring that employees receive the true dollar amount promised to them as compensation. In an attempt to provide equal pay for equal work, Barclays' remedy is to give employees who pay taxes on the value of the health coverage for a same-sex domestic partner or spouse a lump sum reimbursement at the end of each year, essentially a separate line item to cover the taxes these employees paid over the year on their domestic partner's or spouse's health insurance.
"A tax gross-up eliminates the tax inequity faced by employees with same-sex domestic partners and is a progressive step designed to provide equal pay for equal work by gay and lesbian employees," explained Todd Solomon, a partner in the employee benefits practice at law firm McDermott Will & Emery and author of Domestic Partner Benefits: An Employer's Guide, published by Thompson Publishing Group Inc.
"The number of inquiries I have received about domestic partner tax gross-ups has significantly increased within the past six months," Solomon elaborated. "This is sure to be a trend going forward, as covering this tax will undoubtedly be a competitive advantage for many large organizations."
How 'Gross-Ups' Work
According to a description provided by Solomon, a tax gross-up for domestic partner health benefits works this way:
• Consider an employer that wants to gross-up an employee in the 20 percent tax bracket. The fair market value of the employee's nondependent domestic partner coverage is determined to be $200 per pay period.• The employee will incur $40 of tax ($200 x 20 percent) for that pay period. To gross-up the employee, the employer would need to make an additional payment of $48 to this employee—$40 would serve as reimbursement for the tax incurred on the benefits coverage and the other $8 ($40 x 20 percent) would serve as an approximate reimbursement of the tax paid on the gross-up payment itself.
• Consider an employer that wants to gross-up an employee in the 20 percent tax bracket. The fair market value of the employee's nondependent domestic partner coverage is determined to be $200 per pay period.
• The employee will incur $40 of tax ($200 x 20 percent) for that pay period. To gross-up the employee, the employer would need to make an additional payment of $48 to this employee—$40 would serve as reimbursement for the tax incurred on the benefits coverage and the other $8 ($40 x 20 percent) would serve as an approximate reimbursement of the tax paid on the gross-up payment itself.
Note that this example does not include state tax, Social Security (FICA) and Medicare taxes.
Employees with domestic partners will pay about $1,069 more a year in taxes, on average, than a married employee with the same coverage, according to a 2007 report by M.V. Lee Badgett, research director of the Williams Institute, a research group that studies sexual orientation policy issues.
Stephen Miller is an online editor/manager for SHRM.
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