Health Plans for Domestic Partner Can Add to Tax Bill

Attorney Jennifer C. Pizer isn’t quite sure how much it cost when she added her life partner to her health insurance plan. But she knows her tax bill shot up by several hundred dollars--a typical and often unforeseen consequence of using a company’s domestic partner benefits.

“I’ve repressed [the tax cost], it just made me so angry,” said Pizer, managing attorney of the Lambda Legal Defense and Education Fund’s West Coast office in Los Angeles. “I’m grateful that my employer offered these benefits, but I was really angry that we had to pay taxes on them.”

Unlike benefits for spouses, most domestic partner benefits--typically health coverage extended to same-sex and unmarried opposite-sex partners--are taxable under federal and state laws. Only employees, their spouses and their dependents are eligible for tax breaks on health coverage provided by employers. The rules for qualifying as a dependent are fairly strict; among other requirements, he or she must have been a member of the employee’s household for the entire tax year and the employee must provide more than half of his or her support.

Because most unmarried partners don’t qualify as dependents, most employees who use domestic partner benefits must use after-tax dollars to pay their partner’s portion of the premium, rather than the pretax money they can use to pay their own premiums. What’s more, the premiums paid by the company are added to the employee’s gross wages as taxable income, so the employee must pay Social Security and Medicare taxes on the phantom wages.

That latter payment is particularly disturbing to Pizer, who notes that if she dies, her partner would not be eligible for Social Security survivor benefits.

Domestic partner benefits can easily add $1,000 or more to the tax bill of an employee who signs up for the coverage, said Bill Massey, an editor at RIA, a New York-based provider of information and technology for tax professionals.

For example, if the additional coverage costs the company $300 a month and the employee has taxable income of $50,000, the employee would pay more than $1,500 in additional federal, California and Social Security taxes.

Domestic partner benefits have become standard in California’s entertainment industry, and are quickly becoming a feature in more mainstream corporate benefit packages as well. Nearly one-fifth of the work force can get domestic partner benefits from their companies, according to a survey by the Kaiser Family Foundation.

Companies have found that the benefits are a cheap way to enhance their image, because relatively few employees take advantage of the coverage, said Ken McDonnell, research analyst for Employee Benefit Research Institute.

Many gay and straight unmarried partners are able to obtain benefits from their own employers, and some choose to purchase individual policies. Premiums for such individually-purchased policies are treated as medical expenses and deductible from an individual’s taxes to the extent that they exceed 7.5% of the person’s adjusted gross income. If the individual is self-employed, 60% of the premiums are deductible.

Pizer and her partner, who had been working as an independent contractor, found individual coverage prohibitively expensive even with the tax break. So Pizer added her partner to Lambda’s coverage for six months. Eventually, Pizer’s partner took a job as an employee and qualified for her own benefits.

But some domestic partners aren’t able to find jobs with coverage, while others can’t qualify for individual health insurance because of preexisting medical conditions, Pizer noted.

Efforts to provide a tax break for domestic partner benefits have run aground, except in Oregon. A recent state tax ruling there found that benefits for same-sex partners were exempt from state income taxes, although benefits for unmarried opposite-sex partners would continue to be taxed, McDonnell said. The ruling’s reasoning was that opposite-sex couples had the option of getting married, a legal action not available to gay couples, he said.

In California, Assemblyman Wally Knox (D-Los Angeles) introduced a bill last year that would have excluded domestic partners’ medical benefits from taxable income. The bill has since died.