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Tax Implications of Domestic Partner Benefits Preventing Participation?
Benefits & Compensation
Tax Implications of Domestic Partner Benefits Preventing Participation?
Exchange ideas about health plans, retirement, work/life benefits, and employee assistance.
We are thinking of adding Domestic Partner benefits at the request of sev'l employees. But are finding that the tax on the partner portion is making the coverage undesirable to potential participants.
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Forums » Topic Forums » Benefits & Compensation » Tax Implications of Domestic Partner Benefits Preventing Participation?
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Tax Implications of Domestic Partner Benefits Preventing Participation?
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Tax Implications of Domestic Partner Benefits Preventing Participation?
posted at 2/23/2010 7:36 AM EST
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Posts: 3
First: 11/10/2008 Last: 4/20/2011 |
We are thinking of adding Domestic Partner benefits at the request of sev'l employees. But are finding that the tax on the partner portion is making the coverage undesirable to potential participants. Has anyone found a way to ameliorate the additional financial hit to the employee? Do you gross up to cover taxes at ea payroll? |
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Tax Implications of Domestic Partner Benefits Preventing Participation?
posted at 2/23/2010 10:45 AM EST
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Posts: 1103
First: 3/16/2007 Last: 8/19/2011 |
While it was a bout 4 years ago that I last did this we did not have any members of my company turn down domestic partner benefits due to any "onerous" tax implications. I am struggling to understand just how you have computed these tax implications that would send that message. |
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Tax Implications of Domestic Partner Benefits Preventing Participation?
posted at 2/23/2010 11:03 AM EST
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Posts: 2146
First: 2/15/2006 Last: 9/14/2011 |
Have to agree...I am not sure why the communication that this is an aftertax benefit would cause that large of an issue or be that onerous of a tax implication. I know many companies that don't cover domestic partners at all -- regardless of the tax consequences. And the domestic partner is still getting a large benefit out of being covered.
The individual would need to calculate the tax implication and many times it is still smaller than what they would pay for coverage elsewhere since it is a small percentage (assuming a 25% tax bracket)? If not, that is something the individual employee needs to decide. We need to remember as HR/payroll professionals that we are not tax professionals and need to make sure we are not giving our employees tax advise one way or the other. And no, I personally don't feel the need to make every benefit exactly fair to all. Because then you start going down the path of the fact that the company possibly pays more for a married employee with children than it does for a single employee, etc. If you want to be "fair", pay a gross pay and allow the employees to pay 100% of their chosen benefits on as much of a pretax benefit as you can. |
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Tax Implications of Domestic Partner Benefits Preventing Participation?
posted at 2/23/2010 11:05 AM EST
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Posts: 464
First: 6/30/2004 Last: 11/22/2010 |
We run spouses, dependents through our section 125 plan which makes the payment pre-tax. However, since this is a new law in Nevada, we have not yet had any staff take advantage of the provision.
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Tax Implications of Domestic Partner Benefits Preventing Participation?
posted at 2/26/2010 8:23 AM EST
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Posts: 2442
First: 2/12/2000 Last: 9/14/2011 |
The "onerous" tax issue is related to the employers portion of the benefits being added to the W-2 the fact that it may cause other income to be taxed at higher rates.
If the cost to the employer of partner benefits is $500 per month that could easily add an additional tax of $1500 to $2000 a year. No sure this qualifys as a Section 125 Expense since the cost is for someone the government does not recognize as qulaified "dependent" |
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Tax Implications of Domestic Partner Benefits Preventing Participation?
posted at 2/26/2010 8:50 AM EST
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Posts: 2146
First: 2/15/2006 Last: 9/14/2011 |
But isn't a tax of $1500-$2000 per year still cheaper than that person finding and paying for individual coverage elsewhere? I know lots of plans that don't cover domestic partners at all! To me, it just sounds like they are looking a gift horse in the mouth! And complaining about a benefit that the employer doesn't have to provide anyway.
I know they see it as "not fair" that it is taxable when spousal coverage is nontaxable, but that is something to take up with their federal officials (Congress, IRS, etc), not the employer. |
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Tax Implications of Domestic Partner Benefits Preventing Participation?
posted at 2/26/2010 11:14 AM EST
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Posts: 2442
First: 2/12/2000 Last: 9/14/2011 |
Yes, it is a lower cost to obtain the benefits than going on your own, yes it means that they have to incur costs that are higher than other covered dependents, yes they are being treated differently, yes the employer has no choice and yes that is the law of the US. |
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Tax Implications of Domestic Partner Benefits Preventing Participation?
posted at 3/3/2010 7:49 AM EST
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Posts: 1
First: 3/3/2010 Last: 3/3/2010 |
We have offered this for years and our policy has been to increase the employee's next year salary by the previous years tax on the imputed income. That, of corse, increases taxes, etc. but it pretty much makes everyone whole. |
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Tax Implications of Domestic Partner Benefits Preventing Participation?
posted at 3/3/2010 8:09 AM EST
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Posts: 2
First: 3/3/2010 Last: 3/9/2010 |
I agree with some of the other posts that employees who want to sign up for DP (or same-sex spouse) benefits understand the tax implications and that its not equal treatment, but they understand that its due to federal taxation rules and don't hold it against the company. Rather, they appreciate that the benefits are offered. We have found that this is a good recruiting tool. Two other notes.... If the DP qualifies as a tax dependent under IRS rules, then any premiums used to pay for health care plans are pre-tax, and there's no imputed income on the value to the DP, i.e. treated like benefits for oppposite sex spouses. The employees have to make the dependency determination themselves and let HR know. About half our group with DP benefits have made this election. Also note that some states treat DP's the same as spouses, so you may have different tax treatment for state and federal. |
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Tax Implications of Domestic Partner Benefits Preventing Participation?
posted at 3/3/2010 8:31 AM EST
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Posts: 1
First: 3/3/2010 Last: 3/3/2010 |
In every survey I've done in the past, the imputed income cost to the employee for domestic partner coverage was far less than trying to buy equivalent coverage elsewhere. Never had an employee that really needed the benefit turn it down due to the tax consequence. |
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