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Wednesday, 07 March 2018 11:11

Benefit Eligibility and Tax Treatment of Domestic Partners

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In 2014, Colorado legalized same sex marriage, which allowed a spouse of either gender to be a qualified dependent for benefits. Domestic partnership is still a different situation. A domestic partner is defined as an employee’s unmarried partner who lives with them and is of the same or opposite sex. The definition of an eligible dependent for benefit plans may vary depending on the employer and carrier definitions, so it’s important to check in your carrier documents. 

Employers considering domestic partner benefits should become familiar with the numerous legal requirements and the tax treatment of such benefits. Certain states recognize some form of domestic partnerships and have their own requirements and guidelines to consider. In Colorado for example, if a couple is living together and considers themselves married even though they don’t have a marriage certificate, they can be considered a domestic partner or in a common-law marriage. Usually they just need to sign an affidavit stating that their relationship is of a permanent nature and that they live together.

There are some tax implications to be aware of if you do offer domestic partner benefits. Fall River cannot give tax advice, but below are some general guidelines to be aware of. Even though your company and insurance carrier may allow for a domestic partner to be an eligible dependent for benefits, they are not considered spouses under the federal tax code. As a result, here is how employers should handle these situations:

  • Employee contributions: The employee portion of their own premium and that of their children can be on a pre-tax basis. The portion of the premium for their domestic partner and his/her children should be taken out as post-tax. 
  • Employer contributions: If the employer contributes anything toward the premium for the domestic partner and his/her children, this must also be post-tax. If the employer already paid it and took a business expense deduction, it needs to be treated as imputed income for the employee. This can be done each check, or once at the end of the year on the employee’s W2.
  • FSA implications: Employees who are enrolled in an FSA cannot use those monies to pay expenses for their domestic partner or his/her children. 
  • HSA implications: Employees eligible to contribute towards a Health Savings Account (HSA) can’t use their HSA money to pay expenses for their domestic partner and his/her kids. Additionally, it appears that if an employee and their domestic partner are enrolled together in a High-Deductible Health Plan (HDHP), they cannot contribute the full family limit towards that HSA; it should be the individual maximum for that year. Of course, if the employee’s own children are also enrolled, they would be able to contribute the family amount. However, the HSA should still not be used for expenses for the domestic partner. 

Your payroll company should be handling the tax treatment appropriately, if there is a code that identifies the domestic partner. We suggest that employers consult with their legal counsel and tax professional before extending domestic partner benefits, so they are aware of the potential ramifications. 

If you offer domestic partner benefits, these should also be spelled out in your ERISA Plan Documents. Fall River Clients should have an ERISA Plan Document in place unless you’ve declined this service. For companies not yet with Fall River, please check your Plan Document (ask your broker for a copy) to ensure this is covered. By the way, if you don’t have an ERISA Plan Document and are not a church or government employer, you are at risk of incurring significant DOL fines and IRS penalties. Please let us know if we can help get your company compliant and safe from unnecessary fines!

If you need any clarification or a double-check on what’s in your carrier documents or ERISA plan documents, call us today!

Read 2368 times Last modified on Monday, 14 September 2020 16:06
Tonya Young

Tonya is our Senior Account Manager and brings eleven years of prior insurance company expertise to Fall River, having worked at Anthem Blue Cross and Great-West Healthcare (now part of CIGNA). Tonya holds a Bachelor of Science in Psychology from Texas A&M University. Originally from Minnesota, she loves the Colorado outdoors and enjoys family time with her young daughter.