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Overview

Under federal tax law, certain fringe benefits provided to employees are not taxable. For example, health insurance benefits provided by an employer are not taxed to an employee, so long as the benefits are for the employee, the spouse, or the dependents of the employee. Because a domestic partner (registered or non-registered) is not a spouse (as defined by the IRS), the value of the benefit is taxable to the employee unless the domestic partner (registered or non-registered) also qualifies as a dependent under Internal Revenue Code §152.

After-Tax Employee Contributions

Employee contributions toward health plan coverage for a domestic partner (registered or non-registered) and that domestic partner’s child(ren), must be made on an after-tax basis. Federal law only allows pre-tax contributions for a spouse or dependent. The requirement to pay the portion of the employee contribution attributable to the domestic partner’s premium on an after-tax basis does NOT change the pre-tax nature of the employee portion of contribution. Thus, in most cases, the employee contribution will be split between pre-tax and after-tax.

Imputed Income

In addition to after-tax contributions, when a domestic partner (registered or non-registered) is enrolled on the group’s health plan, the Internal Revenue Service (IRS) requires that the employer premium for the domestic partner coverage be imputed as income to the employee. Specifically, the marginal, additional cost of coverage for a domestic partner, minus any employee contribution for that coverage, must be reported as taxable income. Social Security and Medicare taxes must be paid on this additional imputed income as well. Taxes on imputed income are to be withheld from employee paychecks and are reported on the annual W-2.

Children of Domestic Partners

Some employers define the child(ren) of domestic partners as eligible. When this is the case, if a domestic partner has child(ren) who are not legal tax dependents of the employee, the same tax consequences apply to the child(ren)’s premium as apply to the domestic partner. If coverage for child(ren) of a domestic partner is provided under the plan, the marginal cost of the coverage attributable to the child(ren) will be imputed as income to the employee (as is the case with the domestic partner coverage). If child(ren) of a domestic partner are provided coverage under the plan, it is the employee’s responsibility to confirm tax consequences. The employer specifically clarifies that if any taxing authority determines taxes, penalties, or interest to be due or owing with respect to any benefits provided, the employee is solely responsible for the payment of such taxes.

Other employers define the child(ren) of domestic partners as not eligible. When this is the case, if a domestic partner has child(ren) who are not legal tax dependents of the employee, they are not eligible for coverage under the plan.

Special Note About COBRA

As a rule, the federal COBRA law does not extend coverage continuation privileges to domestic partners or their child(ren). Despite this, some employers do allow domestic partners and their child(ren) to elect to continue coverage under COBRA. As such, they may continue coverage under COBRA, but they do not have all the rights of formal Qualified Beneficiaries under the law. Other employers do not offer COBRA continuation coverage to domestic partners and/or their child(ren). Be sure to double check whether your employer offers COBRA to domestic partners.

Federal vs. State Taxation

All health benefits for domestic partners are considered taxable income at the federal level. However, in certain circumstances, they are exempt from California state income taxes. If an employee has a Registered Domestic Partner (has filed a declaration of Domestic Partnership with the Secretary of State according to AB2205) or a valid Same Sex Spouse under California law, the employee is exempt from paying California state income tax on the imputed income. However, Federal income tax, Social Security, and Medicare taxes still apply. The table below illustrates the taxation on imputed income for registered and non-registered domestic partner coverage.

Registered

Domestic Partner

Non-Registered

Domestic Partner

Federal Taxation

Fair market value of benefits (premium) is considered imputed income and taxes are applied.

Fair market value of benefits (premium) is considered imputed income and taxes are applied.

State

Taxation

Value of benefits is not taxable under California taxing authority.

Fair market value of benefits (premium) is considered imputed income and taxes are applied.

Change in Domestic Partnership

It is always the responsibility of the domestic partner to notify the employer if there is any change in domestic partnership status which would make the domestic partner (and any covered child(ren) of the domestic partner) no longer eligible for the employer’s benefit plans. For example, the employer should be notified if there is a change in joint residence status or if the status of the domestic partnership has changed. The domestic partner must notify the employer in writing within thirty (30) days of such change.

A termination of employee benefits coverage will typically be effective on the date the termination of the domestic partnership actually occurs—not when the form is signed and presented. In many cases, employers restrict a subsequent Affidavit of Domestic Partnership from being filed until twelve (12) months after the notification in writing of the termination has been filed.