Domestic Partnerships in pre-tax benefit plans

Disclaimer: Core Documents is not authorized to give legal opinions or tax advice, and nothing written here should not be interpreted as such. We address this matter only as a starting point for our clients and other readers.

A client asks:

In municipalities where Domestic Partnerships are recognized, can an employee-participant (EE) in a company’s Section 125 POP or Health Reimbursement Arrangement (HRA) pay premiums or make flex account contributions on behalf of the partner on a pre-tax basis so far as federal income and FICA tax is concerned?

For the answer, we can look first to IRS Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit) for use in preparing 2017 Returns. Publication 502 is the go-to source for any question about what medical expenses are tax deductible. That includes eligible medical expenses whether paid through your health insurance plan or taken as a tax deduction at the end of the year.

Whose coverage is tax-deductible?

On page 3, Publication 502 answers the question of, “Whose medical expenses can you include?” The answer is, “yourself . . . your spouse or your dependent.”

Who is a dependent in domestic partnerships?

The next step is determining if the partner falls under the definition of a dependent for federal income tax purposes.

According to IRS news release, Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions, the partner can only be considered a dependent of the EE, “if the support requirement is satisfied” (Q12).

The support requirement says a dependent must receive more than half of their support from the person claiming them as a dependent. That’s not as clear cut as what each person earns from a job or other income source.

The IRS states in the same report that, “Because registered domestic partners each report half the combined community income earned by both partners, it is unlikely that a registered domestic partner will have gross income that is less than the exemption amount” (Q11).

Partner can still be covered by EE group plan

The dependent requirement only applies to the tax treatment of salary deductions. A partner may be covered under the EE’s employer-sponsored group health plan (depending on local law and the eligibility terms of the employer’s plan document and Summary Plan Description [SPD]).

What this does mean is that payments an EE makes for a partner’s coverage cannot be made through a pre-tax salary deduction. The amount of premium paid for the partner’s coverage will be paid with an after-tax salary deduction. As such, that amount will remain a part of taxable income on the EE’s Form W-2 at the end of the year.

Summary Plan Description

The employer’s plan document Summary Plan Description (SPD) should indicate in clear language on the coverage of domestic partnerships where local law affirmatively addresses it. The SPD must also explain, in clear language, the tax implications of salary deductions for premiums paid for the partner through the plan.

Next Steps

If this topic impacts your employer-sponsored group benefit plan, be it a Section 125 POP or HRA, your next step should be to conduct your own research on the matter through the many publications available on the IRS web site.

Alternatively, you may wish to contact an attorney or accountant that can advise on your particular situation regarding group health plans and domestic partnerships.

As explained at the top of this article, Core Documents is not authorized to give legal opinions or tax advice, and nothing written here should not be interpreted as such. We address this matter only as a starting point for our clients and other readers.

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