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What every employer should know about offering benefits to the domestic partners of employees

An employer can voluntarily choose to treat an employee’s unmarried partner of the same or opposite sex as a covered dependent for benefit purposes. In general, the definition of a domestic partner includes the following elements:

• both partners are of a minimum age (generally 18) and are mentally competent;
• neither person is related by blood closer than allowed by state law for marriage;
• the partners must share a committed relationship;
• the relationship must be exclusive;
• the partners must be financially interdependent.

What about children of domestic partners?
Children of domestic partners may also be considered eligible dependents if they meet the following criteria:

• biological children of the domestic partner for whom the domestic
  partner has parental rights;
• legally adopted children or children placed for adoption with the domestic
  partner if they are providing at least 50% of the financial support;
• stepchildren who live with the domestic partner at least 50% of the time
  and for whom the domestic partner has financial responsibility;
• disabled children for whom the domestic partner provides at least 50%
  of the financial support and who are incapable of sustaining employment.

What are the tax implications of offering domestic partner benefits?
Generally, the employer-paid premium for domestic partner coverage must be included as taxable income. There are two ways in which employer-paid premiums for domestic partner coverage can be EXCLUDED from an employee’s taxable income:

1. If a domestic partner of the same or opposite sex qualifies as a dependent of the employee, then the employer-paid premium for that domestic partner is excludable. In 2004, the Working Families Tax Relief Act standardized the definition of dependent for federal tax purposes. To qualify as a dependent, an individual must meet the definition of either a "qualifying child" or a "qualifying relative". For a domestic partner to be considered a "qualifying relative", the following criteria must be met:
   
   

   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). Note: Individual who has the same residence as taxpayer is also considered a member of the household and therefore meets the relationship requirement; Individual's gross income is less than $3,200 for 2005; Individual receives more than half of his or her support from taxpayer.

   
   
2. If the employee and the opposite-sex domestic partner are in a common law marriage in a state where such a marriage is recognized (AL, CO, DC, IA, KS, MT, OK, PA, RI, SC, TX and UT), then the employer-paid premium for that domestic partner is excludable.

Unless domestic partners qualify as dependents of employees as defined above or meet the criteria under a common law marriage arrangement in one of the above states, the employer-paid premium for coverage for a domestic partner would need to be included on the employer’s Form 941 for FICA purposes and on the employee’s W-2. For example, if an employer pays $300 in monthly premium for an employee’s medical coverage and an additional $200 per month to include a domestic partner under that medical coverage, that additional $200 per month must be included in both the 941 and the W-2. Contributions made toward domestic partner coverage by the employee do not need to be added to the employee’s W-2 since those contributions must be made with post-tax earnings. (See next paragraph below on Section 125 plans.)

What about States with Legal Same-Sex Marriage or Domestic Partnership Laws?
Currently, only the State of Massachusetts recognizes same-sex marriage. However, the Defense of Marriage Act refuses federal recognition to same-sex marriages and bars same-sex partners from being treated as spouses for federal income tax purposes. Currently, Vermont, California, New Jersey, District of Columbia and Connecticut offer same-sex couples some of the state-level rights and benefits of heterosexual couples under the heading of domestic partnerships or civil unions. While insurance companies may be obligated to make coverage available to individuals in domestic partnership or civil union states, these unions are still not recognized for federal tax purposes.

How does this impact Section 125 Plans (Cafeteria Plans) and COBRA?
If you have a Section 125 plan that allows employees to pay for health plan contributions on a pre-tax basis, they may not use this plan to pay for contributions toward domestic partner coverage. Likewise, domestic partners do not meet the requirements of a qualified beneficiary for COBRA purposes, but, if the insurance carrier is in agreement, the employer may choose to treat domestic partners as if they were qualified beneficiaries with COBRA rights. The employer should indicate in their Summary Plan Description (SPD) that the cost of coverage for domestic partners will be included in the employee’s W-2. The SPD and COBRA notices should also explain how COBRA coverage will be handled for domestic partners.