Many employers include the same-sex partner or spouse of an employee in their health insurance plans. But the federal taxation of these benefits is controlled by the Internal Revenue Code (IRC), a federal law that is subject to the provisions of DOMA (the Defense of Marriage Act). Most employers understand that health plan benefits are tax-exempt when extended to an employee’s spouse, but that under DOMA a same-sex spouse does not count. So are benefits extended to same-sex spouses and partners automatically taxable?
The answer is: not necessarily. The IRC makes employer-provided health plans non-taxable to the extent the benefits are provided to the employee, the employee’s spouse, or the employee’s dependents. While it is true that a same-sex partner or spouse will not qualify as a “spouse” under the IRC, DOMA does not prevent the partner or spouse from qualifying as a dependent.
Many employers do not seem to understand this basic rule of tax law. When will a same-sex spouse or partner qualify as a dependent for purposes of excluding the value of the health plan from taxable wages? When the employee and the partner/spouse share the same household for the year and the employee pays more than 50% of the “support” for the partner/spouse. There are other requirements (like the partner/spouse cannot be a non-resident alien), but these two requirements (same household and over 50% support) are the key ones.
Employers are confused because the employee cannot actually claim the partner/spouse as a dependent for purposes of the dependency exemption if the partner/spouse has gross income in excess of the exemption amount (currently $3650). But for purposes of being a dependent under the employer-provided medical plan rules, there is no gross income limitation.
Employers are also confused because apparently their payroll software is not sophisticated enough to indicate when a spouse under state law is not a spouse under federal law. Yale University recently experienced this problem. See the story in the New York Times here.
Yale failed to withhold federal taxes from the gay and lesbian employees whose partners/spouses were covered under the Yale plan. The administration discovered the mistake, paid the taxes for the employees, and will now collect back from their lesbian and gay employees the amount of the taxes. Great! An employee thought her take-home paycheck was going to increase under the tax deal passed in late 2010. But if she’s a lesbian employee at Yale with a partner covered on the university’s health plan, her paycheck will actually decrease.
So I visited the Yale web pages to see what tax advice they give their employees about the taxation of health plan benefits. Here’s what they say:
Because same-sex marriages or civil unions are not recognized by the federal government, the spouse or partner benefits will continue to be subject to federal taxation. Under Connecticut state law, the spouse or partner benefits will not be taxed.
For full document click here.
I hope that someone at Yale realizes that benefits provided to some same-sex spouses and partners may not be taxable income to the employee. I hope someone at Yale tells its gay and lesbian employees that if their partners/spouses qualify as medical dependents, the benefits will not be taxable. And I hope Yale does not withhold extra taxes from those employees’ paychecks.
And I hope that sometime in the future lesbian and gay employees will not be subjected to this extra tax merely for protecting their families by insuring them in the same way that other families do.
