Domestic Partnership: Health Benefits and Tax Implications

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Prepared by:
Jumpstart:HR
Domestic Partnership
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Health Insurance Benefits
http://twitter.com/JumpstartHR and Tax Implications

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What you will learn:

 Non-Dependent Domestic Partners
 FICA Tax Interpretation of Domestic Partnership
Benefits
 Dependent Domestic Partner Benefits
 How to calculate imputed taxes on domestic
partnership health insurance benefits.
 How
to Create Effective Employee Benefits
Communication

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Non-Dependent Domestic Partners

 Health benefits for non-dependent domestic partners
are treated differently under the Federal Law. Currently
health benefits for non-dependent domestic partners
are taxed as imputed income.
 Imputed Income is the addition of the fair market value of
non-cash compensation, i.e. the benefits, to the employee’s
taxable wages in order to properly withhold income and
employment taxes from the wages.
 Imputed income is reported on Form W-2 as the estimated
value of the employer’s financial contribution towards health
insurance coverage
 Many employers simply take the difference between the cost
of single coverage and the cost of family coverage or one-
dependent coverage to determine the fair market value of
the benefits.


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Non-Dependent Domestic Partners
Continued
 Imputed income is not subject to the federal income
tax withholding rules. Employees may choose to have
federal income tax withheld on the imputed income,
or to pay what may be due when filing their federal
income tax return.
 Pre-tax dollars may not be used to pay for the
partner's coverage, limiting the use of Flexible
Spending Accounts (FSAs), Health Reimbursement
Accounts (HRAs) and Health Savings Accounts
(HSAs).


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FICA Tax Purposes

 Imputedincome is subject to withholding for
FICA tax purposes.
 For employees: Depending on the individual and
the estimated value of the health benefit, can be in
the thousands of dollars per year and can result in
the individual paying upwards of 50% more in
federal taxes. As of 2007, employees with domestic
partner benefits paid on average $1,069 per year
more in taxes than an employee with the same
coverage for a different-sex spouse.


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FICA Tax Purposes Continued

 For employers: Since the imputed income increases
the employee's overall taxable income, it also
increases the employer's payroll taxes, the federal
Social Security (FICA) and unemployment insurance
tax (FUTA), that employers pay based on employees'
taxable incomes. Employers collectively pay a total of
$57 million per year in additional payroll
taxes because of this unequal tax treatment.
Employers also face additional administrative
responsibility of annually tracking the dependent
status of covered same-sex partners and spouses
and maintaining separate payroll functions for income
tax withholding and payroll taxes.

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Dependent Domestic Partners

 Domestic partners who meet the definition of a
dependent under IRC Sec. 152 are allowed to
forgo the additional tax liability. To qualify, an
individual must meet all of the following
requirements:
 The employee provides more than 50% of the partner
support.
 The individual is a member of the employee’s
household.
 The domestic partner’s residence is the same as that of
the employee
**This information can be applied for health
benefits for same-sex domestic partners and
spouses**

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What if:
 The employee has a domestic partner who is not a legal dependent?


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How to Calculate Imputed Tax (IT)

Employee and Spouse w/out IT Employee and Spouse with IT
 $150 monthly premium for  $150 monthly premium for
Employee Only Health Plan Employee Only Health Plan

Employee + Spouse Health Employee + Spouse Health
Plan Plan

 Employee pays $250 for  $250 - $150 = $100 difference
Employee + Spouse monthly between plans
premiums using pre-tax
dollars.  Employee pays taxes on the
$100 difference


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What if:
 The employee has one (or more) legally dependent child and a
domestic partner?


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How to Calculate Imputed Tax (IT)

Employee + Family w/out IT Employee + Family with IT
Employee + Child/ren Health Employee + Child Health Plan
Plan
 $500 monthly premium for
 $500 monthly premium for Employee + Family Health
Employee + Family Health Plan
Plan
 $500 - $250 = $250 difference
 Employee pays $500 for between plans
Employee + Family monthly
premiums using pre-tax  Employee pays taxes on the
dollars. $250 difference


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Got questions? We’re here to help.
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 Navigating and communicating
the new Health Care laws and
regulations can be a challenge.
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Domestic Partnership: Health Benefits and Tax Implications

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Domestic Partnership: Health Benefits and Tax Implications