QUESTION: We are thinking about offering domestic partner coverage under our company’s group health plan. If we add this benefit, will employees be able to pay the premiums pre-tax through our cafeteria plan?
ANSWER: The tax treatment of employer-provided health coverage for an employee’s domestic partner (or civil union partner) depends on whether the domestic partner qualifies as the employee’s tax dependent for health coverage purposes (as defined below). Unless the domestic partner qualifies as the employee’s tax dependent, the employee will be unable to pay for that coverage on a pre-tax basis. Instead, the value of the coverage provided (less any amount paid for the coverage on an after-tax basis) must be included in the employee’s gross income, is subject to federal income tax withholding and employment taxes, and must be reported on the employee’s Form W-2. When determining the value of coverage for this purpose, the cautious approach is to use the greater of the premium for self-only COBRA coverage and the incremental cost of adding the domestic partner to the employee’s coverage.
The following conditions must be met for a domestic partner to qualify as an employee’s tax dependent for health coverage purposes under federal law:
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The employee and domestic partner must have the same principal place of abode for the entire calendar year;
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The domestic partner must be a member of the employee’s household for the entire calendar year;
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During the calendar year, the employee must provide more than half of the domestic partner’s total support;
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The domestic partner must not be the employee’s (or anyone else’s) qualifying child under Code § 152(c); and
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The domestic partner must be a U.S. citizen, U.S. national, or resident of the U.S., Canada, or Mexico.
Your company need not make the determination as to the domestic partner’s tax dependent status but may instead rely on the employee’s certification.
A cafeteria plan may be drafted to allow employees to elect employer-provided health coverage for a non-dependent domestic partner as a taxable benefit. The employee would pay for the coverage through salary reductions and then have the value of the coverage included in gross income. However, the employee must be treated for all purposes under the Code (e.g., reporting and withholding) as receiving, at the time the benefit is received, cash compensation equal to the full value of the benefit and then purchasing the benefit with after-tax contributions. Thus, with proper plan design, a participant may use cafeteria plan salary reductions to purchase health coverage for a non-dependent domestic partner—the coverage will be treated as a cash election and will be taxed at the time it is received. Note also that federal and state tax laws may differ in their treatment of health benefits for domestic partners and civil union partners, so be sure to check the treatment of such benefits under any applicable state tax laws.
For more information, see EBIA’s Employee Benefits for Domestic Partners at Section VI (“Health Benefits: Federal and State Tax Rules and Related Issues”) and EBIA’s Cafeteria Plans manual at Sections X.E.1 (“Accident and Health Coverage for Someone Who Is Not a Spouse or Dependent”) and XI.H (“Providing Health Coverage for Domestic Partners”).
Contributing Editors: EBIA Staff.
