IBA: Providing Benefits to Same-Gender Partners Can Be Taxing

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By Katrina Clingerman and Shalina Schaefer, Ice Miller LLP

More than a dozen states and the District of Columbia now recognize same-sex relationships under various names, such as domestic partnerships, civil unions, or same-gender marriages. (We use the term “same-gender partner” generically to refer to any relationship of this sort.) The recognition provided by these states ranges from recognition of certain partnerships to the granting of certain spousal rights to same-gender partners. Several states and localities now require same-gender partner benefits to be offered to all public employees, require insurers to provide some level of same-gender partner benefits, or require any employers contracting with a municipality to provide same-gender partner benefits to their employees. In contrast, many other states have clarified that marriage is limited to the union of a man and a woman and providing same-gender partner benefits in these states may therefore be difficult or even prohibited. With states varying so widely in their policies, employers must carefully research the applicable laws in each state in which employees are located. Whether a company is offering health coverage to same-gender partners to be competitive, to provide equal benefits to all its employees, or to comply with changes in state or local law, there are federal tax issues to keep in mind. The purpose of this article is to alert you to federal tax issues involved in providing same-gender partner health benefits.

The Internal Revenue Code (“Code”) provides tax-favored treatment of employer-provided health benefits for employees and their spouses, dependents, and children through the end of the year in which they turn 26. However, the Defense of Marriage Act precludes the treatment of a same-gender partner as a “spouse” for these purposes. Thus, the value of health coverage provided to the partner can only be excluded from the employee’s taxable income if the partner qualifies as a “dependent” of the employee under Code Section 152 (a “Code Section 152 dependent”).

Qualifying as a Code Section 152 dependent of an employee would require, among other things, that the partner be a member of the employee’s household, share a principal residence with the employee, receive over half of the individual’s support from the employee, and not be a “qualifying child” of any other person. Often, the financial support requirement disqualifies many same-gender partners from being a dependent. Note that this is not a determination easily made by the employer, which may necessitate establishing a certification process for affected employees.

When a same-gender partner is not a Code Section 152 dependent, the value of health coverage provided to the partner must be added to the employee’s reported income (this is called “imputed income”). This means that both the value of the partner’s coverage subsidized by the employer and the portion of the premium paid by the employee for the partner’s coverage are taxable.

The difficulty in taxing employees on the value of same-gender partner health coverage is in determining the fair market value of such coverage, which is the imputed income amount. The Internal Revenue Service (“IRS”) has refused to issue any rulings that approve of a particular approach. Therefore, employers have adopted a variety of approaches. Most employers agree that beginning with the plan’s own COBRA rates (less the 2% administrative fee) is a logical starting point, and the IRS has officially neither disputed nor blessed this approach.

Employers are in less agreement as to the appropriate means of allocating the value of the coverage where coverage is provided to a family group consisting of both taxable and non-taxable individuals. For example, under an employer’s health plan, one employee may elect family coverage to cover herself, her child, and her same-gender partner. A second employee may elect family coverage to cover himself, his two children, and his same-gender partner. Both employees pay the same premium for family coverage and neither of them can claim their same-gender partner as a Code Section 152 dependent. What portion of each employee’s family premium is attributable to the same-gender partner’s coverage, and, therefore, taxable to the employee? Because no single approach has been approved, the approach is often determined based upon the circumstances and premium structure of the individual employer.

As the trend of providing same-gender partner benefits continues, companies will need to ensure that they understand their federal tax reporting and withholding responsibilities with respect to taxable same-gender partner benefits. In addition, it will be important to understand the state and local laws impacting the provision of such benefits in each locality where the employer operates.•


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  1. If a class action suit or other manner of retribution is possible, count me in. I have email and voicemail from the man. He colluded with opposing counsel, I am certain. My case was damaged so severely it nearly lost me everything and I am still paying dearly.

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