For federal income tax purposes, only legally married spouses and tax dependents may receive employer-sponsored coverage and benefits on a tax-free basis. If an individual doesn't qualify as a legal spouse or a tax dependent, then adverse tax consequences could arise for the employee who's elected coverage for their domestic partner. As a result, most health insurance provided for domestic partners, whether same-sex or opposite-sex, would be taxable to the employee. Note that the Windsor nor Obergefell U.S. Supreme Court decisions related to same-sex marriage impact domestic partner coverage under the health plan or taxability of domestic partner benefits.
However, a domestic partner could still qualify as the employee's tax dependent. To be considered a tax dependent, the domestic partner must meet the IRS’s definition of a "qualifying relative." In order for a domestic partner to be a qualifying relative for purposes of health coverage, the domestic partner must generally meet all of the following requirements:
have a specified relationship to the employee, other than spouse,
have the same principal place of abode as the employee for the taxable year of the employee,
is a member of the employee's household for the taxable year of the employee,
receive over half of his or her support from the employee; and
not be anyone else’s qualifying child
If a domestic partner doesn't meet the IRS’s definition of a qualifying relative, then the employer must impute income on the value of employer-sponsored coverage back to that employee.
To address administrative issues, employers can ask the employee to certify that a domestic partner is a tax dependent as of the date the enrollment form is completed, and require the employee to notify the employer if their status changes. If the domestic partner ceases to be a tax dependent during the upcoming year, then the employee would need to request a midyear election change to impute income for the value of the coverage. The employer would then need to impute income to the employee equal to the value of coverage from the beginning of the year to the change date, in addition to imputing income for the coverage on a prospective basis.
In summary, if an employer offers domestic partner coverage, they must impute the value of that coverage back to the employee, unless the employee certifies that the domestic partner is a qualifying relative under Section 105(b). For questions about what documents are required to prove tax dependency, or anything else related to domestic partnership coverage, please send me an email at sarah@benefitscompliancesolutions.com.