While same-sex marriage is now legal nationwide, some states have maintained laws allowing for civil unions or domestic partnerships, and any employers offering or adding health benefits for employees’ domestic partners should be aware of the tax treatment of these benefits.
Federal distinction between ‘marriage’ and ‘domestic partnership’
In 2013, the U.S. Supreme Court struck down the provision of the Defense of Marriage Act that forbade the federal government from recognizing same-sex marriages lawfully performed by a state.
Following this landmark decision, the IRS addressed its effect on federal tax law, including how it relates to employee benefits. According to the IRS, two individuals are considered married for federal tax law purposes if they are considered married under the law of their state. As a result, same-sex and opposite-sex marriages are treated equally under tax law at the federal level. Civil unions and domestic partnerships, however, are not considered to be marriages by the federal government.
Following the Court’s 2015 decision in Obergefell v. Hodges, which made same-sex marriage legal in all 50 states, the IRS confirmed this distinction: that couples married under state law are considered married for federal tax law purposes, while those in a civil union or domestic partnership are not.
Domestic partner benefits may need to be attributed as post-tax income
The IRS’s distinction is significant, considering that the ability to provide certain benefits pre-tax to employees is a cornerstone of many employers’ benefit plans. However, employee health insurance benefits can be provided pre-tax only to individuals who are the employee’s spouse or tax dependents under federal law.
If the employer’s plan allows the enrollment of unmarried partners, and the employee is in a domestic partnership or civil union, then health insurance benefits must be provided on a post-tax basis (unless the employee’s partner is also his or her tax dependent). This means that the fair market value of the partner’s coverage must be attributed as income to the employee.
However, an employee’s domestic partner is unlikely to also be his or her tax dependent – a term that has a specific and multifactor definition under federal tax law. Some employers address this by requesting a certification or affirmative statement from the employee regarding the tax status of his or her partner. However, in doing so, the employer should take care not to discriminate against gay or lesbian employees by imposing a standard specific to them.
Unfortunately, the IRS has not provided formal guidance on determining the fair market value of the health insurance benefit provided to an employee’s same-sex partner, in order to attribute it as income to the employee.
What about state tax law?
For state tax law purposes, the treatment of employee benefits, such as health insurance provided to a same-sex spouse, depends on how state law treats domestic partnerships or civil unions. Some states grant these arrangements all the rights and responsibilities of marriages, treating them the same for tax and other purposes under state law. Companies operating within several states will need to be particularly cognizant of these differences.
The taxation and valuation of benefits provided to domestic partners is a complex and technical area of the law. Employers who currently offer or are considering adding health benefits for employees’ domestic partners should make a careful review of their benefit plan documents in consultation with their legal and tax advisers. This will help ensure they are offering benefits in compliance with their plan document, as well as applicable federal and state laws.
Disclaimer: This blog includes general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to contact a lawyer licensed in your jurisdiction for advice on specific legal problems.