Several readers had questions about the exact nature of the tax rules for domestic partner health benefits.

Under ERISA and the IRS Code, domestic partners are generally not given the same protections as spouses. 

As a result, employees will generally be taxed “the fair market value” of these benefits, less the amount the employee pays toward coverage.

There are two exceptions:

1. The employee’s partner qualifies as a dependent under IRS Code Section 152(a)(9), or
2. The employee’s partner is recognized as a spouse or otherwise is protected under state law. State laws that recognize same sex relationships and also indicate that no state income tax applies to domestic partner coverage exist in Massachusetts, Connecticut and Vermont.

To qualify as a dependent under Section 152(a)(9), these basic criteria must be met: 

• The employee must provide more than half of his/her partner’s support for the calendar year
• The partner’s primary place of residence must be the employee’s home, and
• The partner must be able to be legally recognized as a member of the household. Section 152(b)(5) says that “an individual is not a member of a taxpayer’s household if … the relationship between such individual and taxpayer is in violation of local law.”

The rules for flexible spending accounts (FSAs) are even more restrictive in terms of pre-tax reimbursements for health services received by a domestic partner. ERISA trumps state law, and flex accounts are also subject to the Defense of Marriage Act (DOMA).

DOMA states that any “ruling, regulation, or interpretation”  by a federal bureau or agency  must apply the definition of a spouse (and, by extension, spousal benefits) to include only the legal union between a man and a woman and not domestic partnerships of either a same sex or opposite sex nature.

As a result, FSAs may not  reimburse employees for domestic partner medical care or for the care of a domestic partner’s dependent. However, if the domestic partner himself/herself meets the aforementioned criteria of a dependent, an employer may reimburse the partner’s medical expenses.

To get around these restrictive rules, many employers require the employee to pay the entire cost of the partner’s coverage. Some firms balance this out by adjusting the employee’s compensation to cancel out the difference.

In 2007, the House and Senate considered a bill that would amend the IRS Code to extend the exclusion from taxation of employer-provide health benefits to domestic partners and their dependent children.  The bill, the Tax Equity for Domestic Partner and Health Plan Beneficiaries Act (S. 1556 and H.R. 1820), did not become law.

Tags: domestic partner benefits