Question: My employer pays 100% of the health insurance premiums for myself and my domestic partner. Are the employer-provided premium payments on behalf of my domestic partner taxable to me?
Answer: Assuming your domestic partner does not qualify as your “dependent” under Section 152 of the Internal Revenue of 1986 (the “Code”), the answer is yes, the fair market value of the employer-provided premiums that are paid on behalf of your domestic partner is taxable to you for federal income tax purposes. In contrast, under California law there are no adverse tax consequences assuming your domestic partner qualifies as a “spouse” (meaning the domestic partnership was properly registered with the State of California).
As background, civil unions and domestic partnerships are not recognized under federal law due to the 1996 Defense of Marriage Act (a.k.a., DOMA). DOMA basically provides that a spouse can be only a member of the opposite sex for purposes of applying federal law. Therefore, domestic partners are not afforded the same tax treatment under the Code as opposite-sex spouses.
This is why, in accordance with DOMA, the Internal Revenue Service has consistently held in private letter rulings that the fair market value of the employer-provided premium payments for the benefit of a domestic partner is taxable income to the employee. A caveat worth noting is that if your domestic partner qualifies as your “dependent” under Code Sections 105(b) and 152, then the employer-provided payments will not be imputed to you as taxable income. Your domestic partner will generally qualify as your dependent if he or she lives with you for more than half the year, and you provide more than half of his or her support.
Keep in mind that the imputation of income due to employer-provided premium payments on behalf of you and your domestic partner applies only for federal income tax purposes. There is no imputed income for California purposes if your domestic partner qualifies as a “spouse” (meaning your domestic partnership was properly registered). This inconsistent tax treatment should create split tax reporting because your gross income will be higher at the federal level.
Anthony J. Eppert is a benefits and compensation attorney in Luce Forward, Hamilton & Scripps, LLP’s San Diego office. He can be reached at (619) 699-2506 or aeppert[at]luce.com. Founded in 1873, Luce Forward is a full service law firm serving all of California with offices in San Diego, Carmel Valley/Del Mar, Los Angeles, and San Francisco.