From the Hotline: Adding Domestic Partner to Group Health Plan

Question: What are the tax implications of adding a domestic partner and her children to a Massachusetts employee’s benefit plan once the employee’s divorce from his current spouse is finalized?

Answer: In your case, the domestic partner may not be eligible to enroll on the group health plan if the employee’s former spouse remains enrolled on the group health plan. Under Massachusetts General Law, the ex-spouse is entitled to stay on the employee’s benefits plan either until one of the parties remarries or the divorce decree specifically states otherwise. Assuming the ex-spouse will stay enrolled, you will need to contact the carrier and your broker regarding the domestic partner coverage. For more information on this requirement, go to https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXII/Chapter176g/Section5a.

Regarding the tax implications of adding the domestic partner and her dependents to your group health plan, please note that if employers provide health insurance to beneficiaries other than a tax dependent as defined by the IRS, such as a nondependent domestic partner, the employer must calculate the estimated fair market value of those health benefits and charge that amount to the employee as “imputed income” on the employee’s IRS Form W-2. This imputed income would have to be calculated and applied to the domestic partner since she is not considered a tax dependent.

According to the IRS, the employer’s cost of the coverage for the non-tax dependent is considered a taxable fringe benefit to the employee. The employer-paid amount is considered taxable. The IRS has provided little guidance as to how employers should calculate the fair market value of coverage. The method employers use varies depending on the employer and the type of coverage it provides. The IRS has not provided regulatory guidance to define the “fair market value” or to calculate the imputed income amount. However, the IRS has not prohibited nor commented against the common practice of using the Consolidated Omnibus Budget Reconciliation Act (COBRA) rate to calculate the coverage value. If the employee makes contributions for the coverage of a domestic partner, those contributions are subtracted in order to determine the “employer-paid coverage” value. Please check with your tax advisor and benefits broker to determine the best method for determining the fair market value of your plan.