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Taxation of Domestic Partner Premiums
More employers are now offering health benefits to the domestic partners of their employees.  This has caused some confusion relative to the taxability of domestic partner premiums.  In most cases, group health insurance premiums are not taxable when provided by an employer for the benefit of the employee and the employee’s dependents.  However, this is NOT generally the case for domestic partner benefits. 

Determining if Benefits are Taxable
Unlike spouses and dependents, the federal government does not typically recognize domestic partners as tax dependents.  As a result, the IRS has stated that the “fair market value” of domestic partner coverage provided under an employer’s plan needs to be taxed like regular income. 

There are some limited cases where a domestic partner can qualify as the employee’s dependent and the benefits they receive under the employer’s plan are not taxable to the employee. To qualify as a tax dependent and to benefit from non-taxable coverage, a domestic partner must meet the standard of a qualifying relative defined as follows:

• Individual does not meet the definition of a “qualified child”;
• Individual bears a relationship to the taxpayer (child, sibling, parent, stepparent, niece, nephew, aunt, uncle or parent-in-law) or the individual has the same residence as taxpayer and is considered a member of the household and therefore meets the relationship requirement;

• Individual’s gross income is less than $3,200;
• Individual receives more than half of his or her support from taxpayer.

Unless the domestic partner meets the criteria above, the value of the coverage provided to them must represent taxable income to the employee.

Taxing Employer and Employee Contributions
An employer contribution on behalf of a non-dependent domestic partner is taxable income to the employee.  Likewise, any contributions made by the employee for non-dependent domestic partner coverage must also be subject to income taxation.  A common method of taxing these contributions is to subtract the cost of the employee’s non-taxable coverage from the total cost of coverage that includes the domestic partner.  For example:

In the chart above, the employer’s overall contribution strategy is to pay 100% of the premium for employee coverage and 50% of the difference for dependent coverage.  Let’s examine a few different coverage scenarios:

Example 1:

• Employee elects husband/wife coverage for self and a domestic partner 
• Employee’s total contribution is $250
• Employer’s total contribution is $650

The employee contribution of $250 must be made on a post-tax basis, as their contribution goes entirely toward domestic partner coverage (single coverage has no employee contribution).  The employer’s $650 contribution can be broken down into two components:  $400 for employee coverage and an additional $250 toward husband/wife coverage.  Only $250 of the employer’s contribution counts as taxable income to the employee.  The employer’s $400 contribution attributed to single coverage is NOT taxable to the employee. 

Example 2:

• Employee switches from parent/child to family coverage in order to add their domestic partner
• Employee’s total contribution is $400
• Employer’s total contribution is $800

In this situation, $200 of the employee’s $400 contribution is taxable because it is the difference between the amount paid for parent/child (coverage for employee and employee’s children) and the amount paid for family (coverage level required to add domestic partner).  As in the first example, the employer’s $800 contribution can be broken down into two components: $600 for parent/child coverage and an additional $200 toward family coverage.  The first $600 paid by the employer is not taxable to the employee, but the additional $200 contribution made in order to cover the domestic partner represents taxable income to the employee.

In the next example, we’ll look at an employee who has a three-tiered rating structure.  In some cases, adding the domestic partner will have no impact on the employee’s taxable income because it will not change the contribution of either the employer or the employee.  For example:

Example 3:

• Employee has family coverage (more than 1 child) and then adds a domestic partner
• Employee’s total contribution is $400
• Employer’s total contribution is $800

Neither the employee nor the employer is contributing any additional amount for the domestic partner’s coverage.  The employee’s $400 contribution can be pre-tax if there is a Section 125 Plan in place and the employer’s $800 contribution is a non-taxable benefit to the employee.

Reporting Taxable Income
Once employers calculate how much of their contributions are taxable income to their employees, they are responsible for representing that additional income on the employee’s W-2 and withholding the appropriate federal and FICA (Medicare and Social Security) taxes, in addition to any applicable state taxes. 

Employee contributions for non-dependent domestic partner coverage do not need to be added to the employee’s W-2, as they are already counted in the employee’s post-tax wages.  

New Jersey state income tax does not apply to domestic partner coverage if the domestic partnership is registered in New Jersey.  New jersey also extends favorable tax treatment to individuals in domestic partnerships or unions created in others jurisdiction (such as a domestic partnership in CA or a civil union in VT). However, the coverage provided to domestic partners who are not registered in NJ or officially sanctioned elsewhere will be subject to New Jersey state income tax.  Domestic partner coverage is taxed by other states including Delaware, New York and Pennsylvania.