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California tax liability for domestic partner health benefits is determined by whether or not there is a registered domestic partnership with the Secretary of State’s office or civil union under California state law.

California law provides that domestic partner health benefits for registered domestic partnerships are non-taxable for State income tax. Individuals are treated as a spousal relationship in a registered domestic partnership. Partnerships are registered on Form DP-1 Declaration of Domestic Partnership, with the Secretary of State’s Office, as provided by Division 2.5 of the Family Code, commencing with Section 297. A number of requirements must be met to qualify as a “Registered Domestic Partnership” in California.  Health benefits in a qualified partnership are non-taxable to the employee, per California Revenue and Taxation Code Section 17021.7.  Reference www.sos.ca.gov, https://www.sos.ca.gov/registries/domestic-partners-registry California AB 25, AB 205, AB 2208, SB 30, FTB Notice 2008-5

Federal tax law requires the inclusion of fringe benefits in an employee gross income, unless specifically excluded. Internal Revenue Code Section 106 contains provisions for exclusion from income of the employer-paid portion of health plans for an employee’s spouse or dependents. Federal tax law does not provide for the tax exclusion of a domestic partner, unless that individual is the employee’s dependent. The fair market value portion of health /benefits insurance coverage provided to a non-dependent domestic partner or civil union spouse is included in Federal gross income as taxable compensation to the employee for Federal income tax and Social Security and Medicare taxes.

Fair market value can be calculated in several ways, as listed below. Employers are advised to confirm with their insurance provider or legal counsel on applying a fair market value. The IRS does not recommend one specific method. 

1. A calculated difference between what the district contributes for the employee alone and the premium the district contributes for coverage of an employee and spouse or family minus the amount the employee contributes for the coverage.
2. An actuarial calculation. The difference between the actuarial value of insurance for a single person and insurance for a couple or family minus the amount the employee pays for the coverage. This method would involve the need for actuarial calculations from your district’s insurance company.  SISC uses this method.

In IRS Letter Rulings it has be held that the amount includable in an employee’s gross income is the fair market value of group coverage, regardless that the fair market value of group coverage may be less or more than the fair market value of individual coverage to the employer (IRS Private Letter Ruling 9111018, 9034048).

If the addition of a domestic partner adds no additional cost to the district due to the use of a blended rate or the employee is already at a family rate, the imputed income to the employee might be viewed as nonexistent.  However, there is sufficient differing legal opinion that a value for Federal income would need to be determined for a benefit provided to a non-spouse, nondependent individual.  Employers may need to review their operational policy in this area or contact their insurance company.

There are various Federal tax consequences for domestic partner coverage, based upon the dependent vs. non-dependent status of an individual and premium payment on a pre-tax and after-tax basis.  Employer tax counsel should review any issues regarding taxable or non-taxable status.

IRC Section 125 regulations provide that employee contributions can be tax deferred for spouse or dependent coverage.  If a domestic partner is not a dependent, the portion of the employee contribution assignable to the domestic partner must be an after-tax deduction.

Any added income is taxable to the employee for Federal Income Tax and Social Security and Medicare taxes.

If all or part of a premium is paid by a district on behalf of an employee or is paid by the employee with premium conversion dollars, the cost is taxable. 

To determine the cost of employer-provided group term life insurance of more than $50,000, IRS regulations provide a table showing the cost per thousand dollars of coverage per month of group term life insurance in the table below.  Do not report the amount of the premiums. The income or value of coverage is not the district’s actual cost of the policy. The employer may treat the costs as paid at any time or period, but they must be treated as paid at least once per year.

Cost Per $1,000 of Protection for 1 Month

 

 

Source: Publication 15-B

Example: 

District XYZ pays ten monthly premiums on an $80,000 group term life insurance policy for John Doe, age 55.  John Doe pays $5 tenthly deductions ($50 annually) toward the cost of the policy. Any employee-paid portion reduces the amount to be reported.

Step 1:  Determine excess coverage:

$80,000 Total Coverage

(50,000) Exclusion

$30,000 Excess Coverage

Step 2:  Determine the yearly value of excess coverage from the table above.  The value from the table per $1,000 coverage for John Doe, age 55, is $.43 per month.  The value of $30,000 excess coverage for 12 months is calculated as follows: (30 x $.43 x 12 = $154.80).  Total fair market value for the 12 months is $154.80.  If John Doe pays $50 towards the cost of the coverage, the value of additional Federal and State income added to his taxable gross is $104.80 ($154.80 - $50.00).

This amount is also includable in W-2 Social Security (OASDI) or Medicare wages, if applicable, and the OASDI or Medicare tax must be withheld.  For employees whose prime assignment is subject to OASDI and/or Medicare, report the value as Social Security wages and/or Medicare wages and process and report payroll deductions at 6.2 percent and 1.45 percent respectively.

Using the above wage calculation: Addition to Social Security wages = $104.80. Tax to be deducted is $6.50 ($104.80 x 6.2%). Addition to Medicare wages = $104.80. Tax to be deducted is $1.52 ($104.80 x 1.45%).

Employer-paid group term life insurance for dependents need not be reported if the policy face value of coverage does not exceed $2,000.  Otherwise, calculate and report the "cost" of the policy in the same way as for the employee, except the $50,000 and $2,000 exclusions do not apply.  Use the “Under Age 25” rate for minor dependents. 

Consult district tax counsel for the special cases of group term life insurance for terminated employees who are retired or disabled, or where the district or charitable organization is the beneficiary, or when the insurance is provided as part of an IRC Section 125 Cafeteria Plan.

District-paid premiums must generally be reported as an addition to reportable Federal and State wages if the proceeds of the policy are payable to the employee’s designated beneficiaries.  If the life insurance is provided as part of a plan, intended to benefit employees or their dependents, the premium payments are not wages for Social Security or Medicare.  If the employer is the sole beneficiary, or the employee pays premiums with after-tax dollars, the value is not included in income.  Consult tax counsel, or the insurance carrier to determine if the insurance is provided as part of a qualified plan, non-taxable plan.

Example:

District XYZ benefit plan pays a $200 annual premium under a plan for a group whole life insurance policy for John Doe. John Doe's wife is the beneficiary.  Request an adjustment to report $200 as additions to Federal and State wages subject to income tax.  "Individual" term life insurance is treated basically the same as group whole life insurance.  We advise employers to seek tax counsel if there is a question whether their particular life insurance is group term life insurance or "individual term" life insurance and regarding possible differences in taxation in special instances.