Benefits Q&A: What to Consider When Offering Domestic Partner Coverage

Question:

We are interested in offering domestic partner coverage on our medical plan, but have heard that it is handled differently from a tax perspective than coverage for legal spouses. What types of tax or legal issues do we need to consider before making this decision?

Answer:

You’re right, there are a number of potential complications to consider, including tax, legal and logistical when considering domestic partner coverage.

First, employees cannot pay their portion of domestic partner premiums on a pre-tax basis. Essentially this means that employees can pay for their own coverage on a pre-tax basis, but the additional premium to cover the domestic partner must be paid 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. Both the employee and employer would pay taxes on this imputed income.

Additional considerations include:

1. Employees cannot use their FSA or HSA to pay the medical expenses of a domestic partner.
2. Domestic partners do not have the same COBRA rights as legal spouses.
3. HIPAA special enrollment rights are not triggered when an employee acquires a domestic partner. This means it may only be possible to add them during open enrollment, especially if your plan is fully insured.
4. Domestic partners who are the “tax dependent” of the employee are treated more like a legal spouse. Are you prepared to explain this (and the other complicated principles mentioned above) to your employees who have domestic partners?
5. Will you also offer coverage to the dependents of domestic partners (who are not related to the employee)?
6. What will be your criteria for establishing the existence of a domestic partnership? What type of documentation will you require, both for its establishment and for when it ends?

Although domestic partner benefits have become less common with the availability of same-sex marriage, we believe they may be experiencing a resurgence. Make sure you think through all the ramifications of offering them and are fully prepared to implement, administer and explain to your employees.