345 / What are domestic partner benefits and how are they taxed?

After July 13, 2013, same-sex couples who were married in a state in which same sex marriage is recognized (the state of “celebration”) are considered spouses, regardless of where they live.¹ Under current law, same sex marriage is now recognized in all 50 states.

Employers may offer a range of domestic partnership benefits, such as family, bereavement, sick leave, and relocation benefits. In general, most people mean employer-provided health insurance coverage when they speak of domestic partnership benefits.

An employee is taxed on the value of employer-provided health benefits for his or her domestic partner unless the domestic partner qualifies as the employee’s dependent under IRC Section 151. The tax is determined by assessing the fair market value of the coverage provided to the domestic partner. This amount then is reported on the employee’s W-2 form and is subjected to Social Security (FICA) and federal income tax withholding.

Any amount received by a domestic partner as payment or reimbursement of plan benefits will not be included in the income of the employee or the domestic partner to the extent that the coverage provided to the domestic partner was paid for by the employee’s plan contributions or the fair market value of the coverage was included in the employee’s income under IRC Section 104(a)(3).²

Coverage of domestic partners, whether or not they qualify as dependents, under an employer-provided health plan will not otherwise affect the ability of employees to exclude amounts paid, directly or indirectly, by a plan to reimburse employees for expenses incurred for medical care of the employees, their spouses, and dependents.

Cafeteria Plans and Flexible Spending Accounts – Contributions used to provide coverage for a non-dependent domestic partner are treated as taxable income. Benefits under flexible spending accounts may not be provided to a domestic partner because these accounts can include only nontaxable income ( Q 3501).

COBRA – A domestic partner may not make an independent election for COBRA coverage, but may be part of an employee’s election ( Q 356 - Q 376).

HIPAA – Domestic partners who are not dependents are not covered by HIPAA, although employers providing health insurance to domestic partners may voluntarily include them in HIPAA certification procedures.