Taxability of Domestic Partner Health Coverage
June 29, 2021
Domestic Partner coverage is allowable under most medical, dental & vision plans, however employers should be aware of the taxability consequences of allowing domestic partner coverage. Medical, dental and vision plan premiums can be paid by employees on a pretax basis if you have a Cafeteria Section 125 plan in place.
Cafeteria plans allow employees to make pretax contributions for group health coverage, but only for employees and their tax dependents (i.e., spouse, children, and § 152 dependents).
Most domestic partners do not meet the financial dependency criteria to qualify under § 152, so contributions for their coverage would have to be made on an after-tax basis. IRS regulations permit an accommodation, however, for the employer’s convenience in administering payroll. That is, the cafeteria plan may allow pretax contributions for the domestic partner’s health coverage, provided that the full market value of the coverage is reported as the employee’s imputed income. For instance, assume the market value of the partner’s coverage is $200, the employee contributes $50 on a pretax basis, and the employer contributes the remaining $150. In that case, the employee’s taxable income is reduced by $50, but $200 of imputed income is reported on the employee’s W-2.
Please make sure you check with your payroll provider on how they will set-up the imputed income for employees that have domestic partner coverage in order to be in compliance. Some payroll vendors (i.e. ADP WFN) have this built right into their benefit module and make administering domestic partner coverage taxability easy.
Can employees make midyear enrollment changes to add or drop their domestic partner?
Special enrollment rules under the Health Insurance Portability and Accountability Act (HIPAA) allow employees to add coverage midyear for a new spouse, but not for a domestic partner (since no marriage has occurred). On the other hand, the HIPAA rule for a midyear enrollment in the event a dependent losing
his or her coverage under another plan does apply to domestic partners (if eligible for the employer’s plan).
Cafeteria plans may allow midyear changes in accordance with IRS regulations for permitted election changes. Although not required, employers that extend health plan eligibility to domestic partners also often provide for midyear enrollment changes under their cafeteria plans. Beware of discrepancies between the group health insurance policy and the cafeteria plan document. Carriers are required to include the mandatory HIPAA special enrollment rules in group policies, but they
often omit the optional cafeteria plan provisions. Always check all documents and policies before allowing an employee to make a midyear change. Self-funded employers should ensure that any stop-loss insurance protection applies with respect to all persons who are eligible under the group plan.
Are domestic partners eligible for other health-related benefits, such as FSAs, HRAs, or HSAs?
In most cases, no. Reimbursements from health flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), and health savings accounts (HSAs) are limited to eligible health care expenses for the employee and his or her tax dependents. Domestic partners are not tax dependents, unless the domestic
partner qualifies under § 152, which usually is not the case.
Are domestic partners eligible for COBRA?
Federal law defines COBRA qualified beneficiaries as the employee (or former employee), spouse, and children if covered under the group health plan at the time of the qualifying event. A domestic partner, therefore, is not a COBRA qualified beneficiary in his or her own right. The employee, however, may elect
COBRA for his or her domestic partner, if the group health plan extends eligibility to domestic partners, since COBRA beneficiaries have the same enrollment options as active employees.
Separately, many states have enacted coverage continuation provisions under their state insurance laws. These often are referred to as “mini-COBRA” laws. Certain states that provide protections for domestic partnerships or civil unions may also extend their mini-COBRA provisions.