Q. Our client offers domestic partner coverage. The HR Director asked if that changes anything in regard to their Section 125 plan. They were under the impression that they had to tax the difference for an employee + 1 differently from an employee-only tier if a domestic partner is covered under the plan.
A. Employees should not be paying for domestic partner coverage under a cafeteria plan. The IRS views the value of the domestic partner’s coverage as taxable to the employee. Essentially this means that employees should pay for their coverage on a pre-tax basis, and the additional premium to cover the domestic partner on a post-tax basis. In addition, the employer may need to impute additional compensation to the employee for the “value” of the domestic partner’s coverage.
Here is an example: Single coverage costs $1,000 per month. The employer pays 60% and the employee pays 40%. The only other level of coverage is “family” and that costs $1,600 per month, with the employer paying 60% and the employee paying 40%. Under this scenario, if the employee enrolls in family coverage to cover the domestic partner, the employee should pay $400 in pre-tax premiums, and $240 on a post-tax basis. In addition, the employee should have imputed income of $760 per month – which is the value of single coverage ($1,000) less the amount paid on an after tax basis ($1,000 – $240 = $760).
The Compliance Question of the Week is provided by Kutak Rock.