The IRS has issued two information letters explaining the federal tax treatment of employer-provided health coverage for employees’ children and domestic partners. Noting that there has been no recent change in federal law or the IRS’s position, the letters explain that an employer can exclude employer-provided health coverage from an employee’s gross income if the coverage is for the employee, the employee’s spouse, the employee’s tax dependents, or any child of the employee who has not reached age 27 as of the end of the taxable year. A domestic partner is not considered a spouse for purposes of the tax exclusion. However, an employer may exclude a domestic partner’s health coverage from an employee’s income if the domestic partner qualifies as the employee’s tax dependent. Generally, to qualify as a dependent for this purpose, the domestic partner must (1) not be a qualifying child of any taxpayer; (2) be a citizen, national, or legal resident of the United States or a resident of a contiguous country; (3) be a member of the employee’s household for the full tax year; and (4) receive more than half of his or her support from the employee.
EBIA Comment: The letters do not address the tax treatment of health coverage for children of domestic partners. That analysis is more complex. Unless the employee has adopted the child or is considered a stepparent under state law, a domestic partner’s child is unlikely to meet the requirements for tax-free health coverage. For more information, see EBIA’s Employee Benefits for Domestic Partners at Sections VI.C (“Federal Tax Code Permits Tax-Free Health Coverage for Spouses and Tax Dependents Only”), VI.D (“How Can a Domestic Partner Qualify as a Federal Tax Dependent for Health Coverage?”), and VI.E (“How Can a Domestic Partner’s Child Qualify as a Federal Tax Dependent for Health Coverage?”). See also EBIA’s Cafeteria Plans manual at Sections XI.C (“Who Is Eligible for Tax-Free Dependent Health Coverage?”) and XI.H (“Providing Health Coverage for Domestic Partners”).
Contributing Editors: EBIA Staff.