Hello, everyone!

We have an employee who's domestic partner is covered under our health care plan. It's been handed to me to set up his taxes correctly. Can anyone point out a good guide for the sticky mess of domestic partner taxation?

I'm pretty certain that I have to include the Fair Market Value of his partner's benefits as well as adjust for the additional amount of taxes that he is not being charged because the plan is exempt from all taxes.

Any help would be greatly appreciated!

Very basically:
- For federal taxes (FIT, FICA, FUTA), a domestic partner cannot be a "spouse" per the federal Defense of Marriage Act (DOMA). It is possible (but not very likely) for a DP to be a "Dependant" under the IRC section 152, rule #9 exception.
- For CA taxes only (SIT, SDI, SUTA), if the DP is registered with the state, it is possible for a DP to functionally be a spouse for CA payroll tax purposes.

So basically a DP can be "qualified" for CA tax purposes but normally not for federal tax purposes.

Example. Sean is an employee. Robert is a DP of Sean registered with CA. Robert cannot be a "spouse" under federal rules and for purposes of this example, is not a "dependant" for federal purposes. Sean's employer pays their medical provider $750/mn family and $450/mn single coverage. Sean's employer charges employees $350/mn family, and $250/mn single coverage. Sean's employer has an IRC 125 plan that supports pre-tax deduction for medical coverage where allowed by law.
- For federal purposes, $250/mn (single coverage deduction) can be pre-tax. The remaining $100/mn deduction is post-tax. For the remaining $400 paid by the employer, $200 is tax free to Sean (his cost of coverage) but the remaining $200 is imputed as income. Since we are talking federal purposes, we are talking the wage definitions for FIT, FICA and FUTA only.
- For CA purposes (SIT, SDI, SUTA), the entire $350/month deduction is pre-tax and the entire $400 coverage paid by the employer is tax free.

The tricky thing about DP and medical coverage is that the federal rules are everywhere but only apply to federal taxes. Each state can be different. Most states follow the federal rules as is. Some states such as CA have rules on DP, but these rules effect only the taxes of the specific state. More over, those states with DP rules do not necessarily have the same rules, so what is true for CA might not be true in a different state with DP rules.

The IRC 152 rule #9 exception is a real exception, but also legally a very limited one. Anyone who wants to try to use should probably check with someone who knows what they are doing first. IRS issued an opinion letter on this a while back, and that is probably a good starting point.

Right, this makes a complicated sort of sense :)

So, I add the amount to their wages, then take it back out again in the same check so the tax is included and the employee pays FMV for their coverage according to their W2s.

If the coverage for Bob and his domestic partner is $ 800, of which Bob pays $ 400, which is a cafeteria 125 so its lowering his taxable wages, do I just need to add in the additional $ 400 as a federally taxable amount to his monthly wages? Or do I need to add the $ 400 and whatever portion of his premium is paid for his domestic partner? (Let's say $ 200). Does that fall under the IRC 104(a)(3)?

I am going to assume that your question is for federal purposes only (FICA, FIT, FUTA), and that the DP cannot be a "spouse" and is not a "dependant".
- The DOMA law pulled the rug out from under IRC 104 and 125. Both of these laws basically use the IRC 152 definitions for "spouse" and "dependant", and DOMA says that a DP is never a "spouse".
- Looking at Section 125 only, Bob can be pre-tax on the deduction only to the extent that he would have been pre-tax under Single coverage. Any additional deduction beyond the Single coverage amount must be post-tax. Per DOMA, a DP is not a spouse and related costs cannot be pre-tax under Section 125.
- Looking at Section 104 only, that section normally makes employer paid medical coverage non-taxable. However again DOMA overrides that by altering the "spouse" definition in IRC 152. So basically whatever the employer paid medical expense attributable to Bob is non-taxable because Bob is an employee and "qualified" under IRC 152. However the DP is not qualified, so any additional employer provided medical expense that occurs solely because of the DP is not qualified and must be imputed as income to Bob. For the sake of discussion, let's say that this is $200/month. From a payroll standpoint, income is imputted by offsetting earnings/deductions credits. Most payroll systems have something in setup that will optionally allow any employee master deduction to automatically create an offsetting earnings. While the earnings/deductions nominally offset each other, they functionally increase taxable wages, which increases taxes and decreases net pay. This is complicated in that this occurs for federal taxes only (FIT, FICA, FUTA). Of course, it is not uncommon for federal and state laws to not agree so some type of "tax grid" for earnings and deductions is common with most payroll systems.

This is not normally looked at, but the IRC 104 and 125 rules have always been dependant on both the nature of the expenses and the beneficiary of the expenses being "qualfied". While DP has brought a certain focus to this, there was always the possibility of non-qualified medical expenses. Your employer may or may allow you do add your spouse's uncle to your medical coverage but under federal rules this is not covered. Certain types of medical expenses (having your spirit meditated to maybe) are not covered.

Our payroll company, ADP, won't help me set up anything in their grids due to some concern about 'liability'. They suggested I contact 'the' CPA, so I'm currently stumbling through their packet on my own and trying to make sure I get the grids all set up correctly.

Thank you for this, it does clarify what I've been researching. It sounds like I will have to set our employee up so that everything over their own portion of the medical 125 deduction is offset for federal tax purposes and then make certain their partner's portion of the employer paid portion is added to their total wages for reporting purposes, as federally taxed but state exempt.

Our payroll company, ADP, won't help me set up anything in their grids due to some concern about 'liability'. They suggested I contact 'the' CPA, so I'm currently stumbling through their packet on my own and trying to make sure I get the grids all set up correctly.

Thank you for this, it does clarify what I've been researching. It sounds like I will have to set our employee up so that everything over their own portion of the medical 125 deduction is offset for federal tax purposes and then make certain their partner's portion of the employer paid portion is added to their total wages for reporting purposes, as federally taxed but state exempt.

That sounds right to me.

Believe me, you don't want to take tax advice from that payroll company. They may have people that know the answer, but they are not in that business and have no liability if they give you a wrong answer.

Oh, this much I know! I'm mostly frustrated that the packet they sent me is all about ADP specific information, like which grids to have the taxes applied to and that part they won't walk me through on, either.

Interestingly, today my HR dept informed me that two employees want to enroll their DPs in our health insurance plan, so this information is timely for me, too. I definitely appreciate the information.

Can DAW or Patty please supply the links to the regulations covering how this is handled for Federal and California?

Thank you!!!:D

Federal is easy. Under federal law (Defense of Marriage Act), there is no such thing as Domestic Partners. It just does not exists under federal law. You can search DOMA (which will basically say that marriage is defined as being "solely between a man and a woman", you can look at IRS pub 15B, or you can look up IRC (Internal Revenue Code) section 152 which is where the "qualified" dependant language for all federal benefit rules exists.
http://en.wikipedia.org/wiki/Defense_of_Marriage_Act
http://www.fourmilab.ch/ustax/www/t26-A-1-B-V-152.html

States can and sometimes do have their own DP rules, but these rules effect state issues only, such as state taxes. The key to the CA rules, if the parties are in the CA DP registry, then:
297.5. (a) Registered domestic partners shall have the same rights, protections, and benefits, and shall be subject to the same responsibilities, obligations, and duties under law, whether they derive from statutes, administrative regulations, court rules, government policies, common law, or any other provisions or sources of law, as are granted to and imposed upon spouses.


http://www.sos.ca.gov/dpregistry/
http://www.leginfo.ca.gov/cgi-bin/displaycode?section=fam&group=00001-01000&file=297-297.5

17021.7. (a) (1) For purposes of this part, the domestic partner of the taxpayer shall be treated as the spouse of the taxpayer for ...

http://www.leginfo.ca.gov/cgi-bin/displaycode?section=rtc&group=17001-18000&file=17001-17039.2

I think you should consult a tax specialist and not rely on a blog..my two cents