The following is a high level summary of some of the practical tax issues that arise when an employer provides health plan coverage to an employee’s domestic partner, often in connection with a Section 125 Plan. American Fidelity does not provide tax or legal advice. Contact your tax advisor for the most accurate information that applies to your specific situation.
An employer is welcome to extend major medical coverage, for example, to domestic partners. However, if the domestic partner is not a qualified dependent (more details below) for federal tax purposes, Similarly, under federal tax guidance, it is permissible for an employer’s Section 125 Plan to allow an employee to make contributions for a domestic partner’s coverage on a pretax basis via salary deferral, but the value of the domestic partner’s coverage would then be imputed to the employee as income. However, reimbursements may not be made from a Health Flexible Spending Account for an individual who is not a qualifying individual (more details below).
Tax Qualified Domestic Partners for Benefit Plan Purposes under Federal Tax Law
Federal rules provide that a tax-qualified dependent must be either a qualifying child or a qualifying relative. The following is a summary of the most commonly referenced federal qualification requirements applicable unrelated individuals that apply for benefit plan purposes. A domestic partner generally must satisfy these requirements in order to be deemed a tax-qualified dependent.
An unrelated individual (as opposed to children, grandchildren, siblings, nieces, and nephews), may be a “qualifying relative” if, for the taxable year, the individual:
- Has the same principal place of abode as taxpayer,
- Is a member of taxpayer’s household (and the relationship does not violate local law), Receives more than half of his or her support from the employee, and
- Is not a “qualifying child” of any taxpayer.
State tax rules may differ.
Health FSA Definitions for Qualifying Individuals
A Health FSA may reimburse Eligible Expenses incurred by qualifying individuals, which are defined as follows: A “Qualifying Child” is:
- A child (including natural, adopted, foster and/or step child) and descendent of such person (i.e., grand and great grandchildren), or a brother or sister (including step) and a descendent of such person (i.e., nieces or nephews, including step nieces and nephews);
- Has the same principal abode as the employee for more than half of the year;
- Is under the age of 19 at the end of the year, or, if a full-time student, under the age of 24 at the end of the year, or is permanently and totally disabled; and
- Does not provide more than half of his or her own support.
A child of parents who are divorced or separated is a qualifying child of both parents. An “Adult Child” is:
- A child (including natural, adopted, foster and/or step child) of an employee who as of the end of the calendar year has not attained age 27. Only eligible as a Qualifying Individual with respect to benefits provided on or after March 30, 2010.
A “Qualifying Relative”:
- A child (including natural, adopted, foster and /or step child) and descendent of such person (i.e., grand and great grandchildren), or a brother or sister (including step siblings), parent or ancestor of the parent, stepparent (not including ancestors), aunt or uncle, niece or nephew, inlaws, or any other individual not listed above (i.e., an unrelated individual) who, for the taxable year (1) has the same principal place of abode as taxpayer, and (2) is a member of taxpayer’s household (and the relationship does not violate local law), and
- Receives more than half of his or her support from the employee, and
- Is not a “qualifying child” of any taxpayer.
The Value of Coverage
Many employers have questions about what “value” should be imputed as income. There is some ambiguity about how to properly value health plan coverage under the federal guidance that is currently available. States may have their own rules.
To determine the value of health coverage, such as medical, dental, and vision insurance, provided to a domestic partner who does not qualify as a dependent for federal tax purposes, the employer might use either the actuarial value or the total cost of the coverage as the amount to impute. Because employers don’t typically know the actuarial value of their coverage, most use cost, which they calculate using the COBRA rules. (Note, however, that in this situation the cost would be 100% of the cost of coverage without the additional 2% administrative fee the employer is allowed to charge in the case of COBRA.)
The value, or COBRA cost, is often less clear when the employee’s entire family has coverage but only the value for one family member needs to be imputed (such as a domestic partner who is not a tax-qualified dependent). That would be the case for a domestic partner who is not a tax qualified dependent under federal and/or state tax rules.
Informal federal guidance has indicated that one method to calculate the value of coverage of just one family member who is receiving coverage under an employee’s plan would be to take (1) the total cost of coverage for the employee’s entire family who is enrolled in coverage under the plan, less (2) the total cost of coverage without including the nontax qualified individual (e.g., the domestic partner). For example, if the employee has Employee+1 coverage, subtract the cost of Employee Only coverage to determine the value of covering the additional person.
Form for Employees to Indicate Tax Status
Many employers provide a form for employees to indicate whether a domestic partner qualifies as a dependent for tax purposes. A sample is available in the sidebar for your convenience. Note that this is provided for informational purposes only – American Fidelity does not provide tax or legal advice.