9102 / What are domestic partner employment benefits and how are they taxed?

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).¹

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.

Same-sex couples who are legally married in any state are treated as spouses for all federal law purposes (including employment-related retirement benefits, see Q 9104), regardless of where they live.² As a result, many domestic partners have chosen to legally marry, and, therefore, some expect that fewer employers will offer domestic partner benefits in the future.