If domestic partners are unmarried opposite sex but declared as a dependent on IRS tax return, is the cost of the health benefit considered taxable income to the employee? Can domestic partners use a joint HSA account?
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Domestic partnership benefits are benefits that an employer may offer at its discretion, where not mandated by law, to an employee’s unmarried partner who is either of the same or opposite sex. The definition of eligible dependents may vary depending on the benefit plan. For example, it is possible the definition could be broader under the health insurance policy than under the life insurance policy.
For this reason, it is advisable for any company policy to state that eligible dependents may be covered without defining the term, and to state that coverage is subject to the terms, conditions, and restrictions of the specific plan document or insurance agreement.
Domestic partnership benefits are offered for a variety of reasons, including fairness, to attract and retain talent, to improve employee morale, and because of state or local law. Some municipalities require government contractors to offer the same benefits to employees’ domestic partners that they offer to employees’ spouses.
Legal Issues. Organizations considering domestic partnership benefits should become familiar with numerous legal requirements. Certain states recognize some form of domestic partnerships and have their own requirements with some general guidelines to consider. An employer should always consult with its legal counsel and its insurance company before extending these types of benefits.
Benefits to Consider. Most employees with domestic partners seek healthcare insurance and leave benefits. Leave includes bereavement, parental leave, and use of accumulated sick leave to care for a domestic partner. The federal Family and Medical Leave Act (FMLA) does not cover domestic partners, but federal guidelines state that nothing in the FMLA prohibits employers from extending the provisions of the FMLA to domestic partners. States that recognize same-sex marriage and domestic partnerships may require employers to provide certain benefits that are governed by state law, such as medical leave or family leave. Other benefits offered to domestic partners include relocation, access to employer facilities, and attendance at employer-sponsored functions.
Determining the Status of the Relationship. In the absence of a state or municipal registry of domestic partnerships, some employers require a statement of financial interdependence and of intent that the relationship is permanent. Generally, employers require that domestic partners be 18 years of age or older, be unmarried, and live together. Many employers accept as verification of the relationship a notarized affidavit of domestic partnership signed by the domestic partners.
Group Term Life Insurance. Federal income tax law requires employers to calculate imputed taxable income for employees that receive group life insurance coverage in excess of $50,000 (IRC Sec. 79(a)). The amount of imputed taxable income must be reported on the employee’s W-2. If an employee’s spouse or dependents receive group term life coverage, the employee is taxed on the cost of that coverage to the extent that the cost is not a “de minimis fringe benefit” under IRC Sec. 132(e)(1). A domestic partner is not considered a spouse under federal tax law but may qualify as a dependent and may be treated accordingly.
Group Health Plan Special Enrollment Rights. Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the “dependent” of an employee is entitled to special enrollment rights in the employee’s group health plan if the dependent initially declined coverage because he or she had other coverage, and the other coverage was subsequently lost. Applicable federal regulations define a “dependent” as “any individual who is or may become eligible for coverage under the terms of a group health plan because of a relationship to the participant.”
Therefore, if a group health plan covers domestic partners, a domestic partner may be eligible for special enrollment under HIPAA. For example, if an employer’s group health plan offered coverage to employees’ domestic partners and a domestic partner initially declined coverage because of coverage through his or her own employer, the domestic partner would be eligible for special enrollment under HIPAA if he or she subsequently lost group health coverage because his or her employment was terminated.
Taxation. The IRS has a Q&A that discusses various tax issues related to domestic partners available at here. It provides the following related to healthcare:
Q12. Can a registered domestic partner be a dependent of his or her partner for purposes of the exclusion in section 105(b) for reimbursements of expenses for medical care?
A12. A registered domestic partner (Partner A) may be a dependent of his or her partner (Partner B) for purposes of the exclusion in section 105(b) only if the support requirement (discussed in Question 11, above) is satisfied. Unlike the requirements for section 152(d) (dependency deduction for a qualifying relative), section 105(b) does not require that Partner A’s gross income be less than the exemption amount in order for Partner A to qualify as a dependent.
Q11. Can a registered domestic partner be a dependent of his or her partner for purposes of the dependency deduction under section 151?
A11. A registered domestic partner can be a dependent of his or her partner if the requirements of sections 151 and 152 are met. However, it is unlikely that registered domestic partners will satisfy the gross income requirement of section 152(d)(1)(B) and the support requirement of section 152(d)(1)(C). To satisfy the gross income requirement, the gross income of the individual claimed as a dependent must be less than the exemption amount ($3,900 for 2013). Because registered domestic partners each report half the combined community income earned by both partners, it is unlikely that a registered domestic partner will have gross income that is less than the exemption amount.
To satisfy the support requirement, more than half of an individual’s support for the year must be provided by the person seeking the dependency deduction. If a registered domestic partner’s (Partner A’s) support comes entirely from community funds, that partner is considered to have provided half of his or her own support and cannot be claimed as a dependent by another. However, if the other registered domestic partner (Partner B) pays more than half of the support of Partner A by contributing separate funds, Partner A may be a dependent of Partner B for purposes of section 151, provided the other requirements of sections 151 and 152 are satisfied.
HSA. Finally, you asked whether domestic partners can use a joint HSA. It is important to review the plan documents associated with the plan to determine eligibility. Generally, as noted above, if a domestic partner is not a qualified dependent, the benefit would not be eligible for tax-free reimbursement.
Domestic Partner in Mass.
Do I set up the employee deduction as a pretax (we have 123 cafe plan) and the domestic partner get set up the same ways, but it is a post tax deduction and then set up the imputed income