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Record retention is complex and time consuming. However, in addition to complying with various federal and state laws, keeping good, well-organized records can be very helpful in documenting and supporting an organization’s employment actions.
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October 03, 2004
Benefits for Domestic Partners, Part II: The Legal Basics

(Editor's note: This article is Part II in a series of two articles covering the basics of domestic partnership benefits. In the first article, we discussed the definitions and practical considerations of addressing the issue of domestic partnerships. In this one, we address the legal implications.)

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Legal Editor, Business & Legal Reports

If you are considering offering domestic partnership benefits, what are the legal requirements? How does the Internal Revenue Service (IRS) treat benefits to a domestic partner and what requirements does the employer have to meet? Is income subject to withholding for federal FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act)? What about health insurance and the Consolidated Omnibus Budget and Reconciliation Act (COBRA)?

Although certain states recognize some form of domestic partnerships and have their own requirements, there are some general guidelines to consider when formulating your policy on domestic partnerships and benefits. (Note: An organization should always consult with a lawyer, as well as its insurance company, before offering benefits to domestic partners):

Tax treatment and dependency status

As you may already know, married employees pay no taxes on healthcare benefits that they receive for their spouses and dependents because federal tax laws do not classify the money that is paid by the employer for these benefits as wages. Treasury Regulation §1.106-1 provides that an employee's gross income does not include contributions that his or her employer makes to an accident or health plan for compensation (through insurance or otherwise) to the employee for personal injuries or sickness of the employee, the employee's spouse, or the employee's dependents. Therefore, the money that is paid for health benefits for the employee's spouse and dependents that is not considered wages is excluded from the employee's gross income (Internal Revenue Code (IRC) §§105-106).

How are domestic partners treated under the Tax Code? Employees with a domestic partner often must pay for coverage with post-tax dollars, and then must pay taxes on the employer's share of payment for benefits of domestic partners as added income because domestic partners do not have status as spouses (under the Defense of Marriage Act (DOMA), discussed in Part I of this series, or as a dependent.

Qualifying as a dependent

Because a domestic partner is not considered a spouse, the tax treatment of the domestic partner depends on whether the domestic partner is able to qualify as the employee's dependent. Three criteria must be met for a domestic partner to be considered a dependent (IRC §152).To be considered a dependent:

  1. The person must receive more than half of his or her support from the employee;

  2. The person must live in and be part of the employee's household; and

  3. The relationship must not be in violation of local law.

If the employee does qualify as a dependent under the IRC, then payments for healthcare coverage and other benefits will be treated in the same way as coverage for other employees with family coverage. If payment of health insurance premiums is made through a cafeteria plan, the premiums for domestic partner coverage may be deducted from the employee's salary on a pretax basis.

If the domestic partner does not qualify as a dependent, the value of the coverage is included in the gross income of the employee, and the value of the coverage-not the amount of the benefits-must be reflected on the employee'sW-2 Form.

Tax determination

For an employee who does not receive tax-favored status, the tax is determined by assessing a fair market value for covering the domestic partner. The amount is then reported on the employee'sW-2 Form and is subjected to Social Security, FICA, FUTA, and federal withholding taxes.

Wage withholding, FICA, and FUTA

An employee who covers a domestic partner who does not qualify for dependency status must pay taxes on that health coverage. IRS has determined that the amount of the health coverage must be included in the gross income of the employee because it constitutes wages under Code Section 3401(1) and Section 3121(a).The amount of health coverage is, therefore, subject to withholding of income, FICA, and FUTA taxes. The amounts to be withheld need to be deducted from the employee's other pay.

In order to avoid any misunderstandings about tax consequences to the employee, many employers include a statement about tax consequences in an affidavit that the employee is asked to sign. An example might be that: federal taxes (federal tax, FICA, and FUTA) and state taxes are deducted for the employee's taxable income for the cost of providing coverage for domestic partners. Additional handouts with additional explanations are also a common practice.

Section 125 flexible benefits and spending accounts

What is the tax treatment for a domestic partner with a Section 125 flexible benefit plan and spending account? Under a cafeteria plan or health flexible spending account (FSA), if a domestic partner does not qualify as the employee's dependent, the employee cannot pay premiums for coverage for that partner on a pretax basis through the premium conversion portion of a Section 125 cafeteria plan. The employee may not submit the domestic partner's healthcare or dependent care expenses for pretax reimbursement from the employee's health FSA, even if the employee paid those expenses.


Federal law denies same-sex couples coverage under COBRA for the nonemployee same-sex spouse (29 U. S. C. §§ 1161 - 1168). Insurance companies are covered by both state and federal regulations and, therefore, may be required under state regulations to extend benefits to a same-sex partner. Before extending such rights, an organization should obtain an insurance carrier's written consent.

ERISA plans

The Employee Retirement Income Security Act (ERISA) preempts state and local law so that a same-sex spouse is not recognized and entitled to coverage. An employer has the option to extend ERISA to same-sex spouses and domestic partners, however, certain spousal benefits-such as survivor and pre-retirement annuities under pension plans and the right to death benefits under 401(k) plans-will not be afforded to these couples pursuant to DOMA.

It is important to remember that, under ERISA, once an employer writes a definition of domestic partner into a benefit plan, it is obligated under federal law to follow that definition when administering the plan. Therefore, the employer must be very careful
that the language used accurately reflects only those situations where the employer intends to apply coverage.

KF 10-04

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