Question: Why is domestic partner health coverage subject to imputed income?

Short Answer: The Internal Revenue Code generally does not provide employees with an exclusion from income for domestic partner health coverage. Employers must therefore (in most situations) take the employee contribution for domestic partner coverage on an after-tax basis, and treat the fair market value of the employer payment for the domestic partner’s coverage as taxable imputed income to the employee.

General Rule: Employers Can Define Health Plan Eligibility
ERISA does not impose any requirements or restrictions on health plan eligibility. Accordingly, within any restrictions imposed by the plan’s insurance carrier (or stop-loss provider for self-insured plans), employers have broad discretion for establishing which dependents will be eligible for coverage under the health plan.

For more details:

• Defining Eligibility for Health Plans

• Addressing Employee Exception Requests to Enroll an Ineligible Dependent

• Newfront ERISA for Employers Guide

Starting Point: Types of Domestic Partner Health Plan Eligibility
There are two main types of domestic partners that are often included as eligible health plan dependents:

1. Registered Domestic Partners; and

2. Company-Defined Domestic Partners

Registered Domestic Partners
Registered Domestic Partners (RDPs) are relationships that have been formally registered with the state. For example, an RDP relationship in California must meet the requirements set forth in California Family Code §297 to be registered with the Secretary of State, and RDP status has all the same rights and obligations (including community property) for state law purposes as those granted and imposed upon spouses. Nonetheless, RDP status is not a marriage.

State insurance law may impose certain coverage requirements for RDPs that apply to fully insured plans sitused in that state. For example, California requires insurance carriers to provide coverage for RDPs on the same basis as spouses. This means that for any fully insured health plan option sitused in California, RDPs must have access to the same benefits offered to spouses.

Company-Defined Domestic Partnerships
Some employers offer domestic partner health plan coverage more broadly than what is available or required for RDPs, generally to accommodate employees who do not want to enter into a state-recognized relationship to enroll their partner in the health plan. In some markets and industries, offering a company-defined domestic partnership eligibility category is an important recruiting and retention matter for employees who expect the ability to cover their partner based on a relationship with a lower standard than formal RDP status.

Employers can develop a domestic partner policy that permits employees to enroll their domestic partner simply by meeting the company’s definition of a domestic partner. These domestic partners are typically referred to as “company-defined domestic partners”. Employers taking this approach should first ensure that the insurance carrier (or stop-loss provider for self-insured plans) will accommodate the company’s definition of a domestic partnership. For example, some carriers require employers to declare in the application or renewal that they are offering coverage more broadly than the RDP requirements.

For more details:

• Registered Domestic Partners and Company-Defined Domestic Partners

• Newfront Health Benefits for Domestic Partners Guide

General Tax Rule: All Compensation Taxable Unless Exception Applies
The general rule under Internal Revenue Code §61 is that taxable gross income means all income from whatever source derived, including fringe benefits. Therefore, any form of compensation—including non-cash forms like employee benefits—are included in employees’ taxable income unless a specific exclusion applies.

Health benefits and coverage are of course generally excluded from employees’ income, per §105 and §106. However, the exclusion from income does not apply in all circumstances. One of the key requirements to qualify for the exclusion is that the health coverage be provided to specific categories of individuals.

Exclusion from Income for Health Plan Coverage Applies Only for Certain Individuals
The health coverage exclusion from income applies only for the following categories of individuals:

1. Employee

2. Employee’s Spouse

3. Employee’s Tax Dependents (with certain modifications)

4. Employee’s Children (through the end of the calendar year in which they reach age 26)

Health Plan Coverage Exclusion from Income for Employee’s Spouse (Not Applicable to Domestic Partners)
Health plan coverage for an employee’s legally married (same-sex or opposite-sex) spouse is excluded from income. The key point for this category is that a domestic partner is not a spouse. Spouse status is determined under applicable state law, which requires marriage. Marriage is typically entered into by the standard formal license and ceremony (solemnization) process. A few states offer common law marriage, which recognizes a couple as married based on criteria unrelated to a license and ceremony.

Regardless of the method of entering into the marriage, health coverage qualifies for the exclusion from income for a spouse who has entered into a legally valid marriage with the employee.

• Note: Since the U.S. Supreme Court’s decision overturning DOMA in Windsor in 2013 (subsequently expanded by Obergefell in 2015 to provide a constitutional right to same-sex marriage), same-sex spouses are always treated identically for all tax purposes, which means no imputed income applies.

Health Plan Coverage Exclusion from Income for Employee’s Tax Dependents
Health coverage for an employee’s tax dependent is excluded from income. A domestic partner’s health coverage qualifies for the exclusion from the employee’s income only if the domestic partner qualifies as the employee’s tax dependent under IRC §152, as modified by §105(b).

To meet the modified “qualifying relative” tax dependent test set forth in those rules, the domestic partner relationship generally must meet the following requirements:

• Not a Qualifying Child: The domestic partner cannot be a qualifying child of any taxpayer;

• Member of Household: The domestic partner must live with the employee all year as a member of the employee’s household (the “same principal place of abode”), except for certain relatives not subject to this residency requirement;

• Support Test: The employee must provide more than half of the domestic partner’s total support for the year; and

• Citizen/Resident Test: The domestic partner must be a U.S. citizen, U.S. resident alien, U.S. national, or resident of Canada or Mexico.

Important Notes:

• This is just a general overview of tax dependent status—for more details see IRS Publication 501.

• The §105(b) modification removes certain requirements from the general qualifying relative definition, including the gross income limitation ($5,200 in 2025).

• Employers should not provide personal income tax advice, and any questions about tax dependent status should be referred to the employee’s personal tax advisor.

Employers May Rely on Employee Certification of Tax Dependent Status
Most employers offering domestic partner coverage require employees to complete an affidavit whereby employees attest to their relationship either a) being a state Registered Domestic Partnership, or b) meeting the company-defined domestic partner status to be eligible to enroll the domestic partner in the health plan. This approach generally serves two primary purposes: 1) ensuring that employees are aware of the company’s domestic partner definition, and 2) preventing potential fraudulent enrollment to some degree.

Employers will typically include in the form an option for employees to certify if their domestic partner qualifies as a tax dependent for health plan purposes. The IRS has confirmed that employers may rely on these certifications to treat the domestic partner as a tax dependent and therefore exclude the value of their health coverage from the employee’s taxable income. Furthermore, the IRS has informally stated that employers must inquire as to whether domestic partners qualify as a tax dependent to ensure proper tax treatment.

Health Plan Coverage Exclusion from Income for Employee’s Children
Health coverage for an employee’s children is excluded from income. A child’s health coverage qualifies for the exclusion from the employee’s income only if the child qualifies under IRC §152, as modified by §105(b).

For a domestic partner’s child to meet the modified “qualifying child” test to qualify as the employee’s §105(b) child, the child generally must be under age 27 as of the end of the taxable year and be the employee’s:

• Biological Child;

• Stepchild;

• Adopted Child; or

• Foster Child.

Important Notes:

• This is just a general overview of qualifying child status—for more details see IRS Publication 501.

• The §105(b) modification removes many of the requirements from the general qualifying child definition, including the requirement that the child be under age 19 (or age 24 if a full-time student) and additional residency, support, and tax filing status restrictions.

• Employers should not provide personal income tax advice, and any questions about qualifying child status should be referred to the employee’s personal tax advisor.

With respect to stepchildren, IRS guidance confirms that children of a Registered Domestic Partner are considered to be the employee’s stepchildren for these purposes if treated as such under state law. With respect to adopted children, the exclusion from income applies if the employee has adopted the domestic partner’s child. With respect to foster children, the exclusion from income applies only if the child is the employee’s foster child (i.e., not just the domestic partner’s foster child).

Imputed Income Requirements for Domestic Partner Health Plan Coverage
Where the employee’s covered domestic partner (or domestic partner’s child) does not qualify for the health coverage exclusion from income set forth in §105(b), such health coverage is taxable to the employee. The health benefits attributable to the domestic partner’s health coverage is included in gross income, subject to withholding and payroll taxes, and reported as income on the Form W-2 (Boxes 1, 3, 5).

There are two adverse tax consequences of non-tax dependent domestic partner health coverage:

1. Imputed Income: The employee must receive imputed income for the fair market value of the cost of coverage paid by the employer for the domestic partner’s coverage.

2. After-Tax Employee Premium: The employee must pay the employee-share of the premium for the domestic partner’s coverage on an after-tax basis.

Determining the Fair Market Value (FMV) of Domestic Partner Health Plan Coverage
The IRS has always been notoriously vague addressing how to determine the appropriate FMV amount to include in employees’ taxable income for domestic partner health coverage. While it has confirmed in multiple layers of guidance that employers must apply the two adverse tax consequences outlined above, the IRS has never blessed any specific method of making the FMV determination for the taxable imputed income amount.

For example, when confronted on this issue of the FMV determination in a private letter ruling, the IRS deflected by stating that it “does not ordinarily rule on fact issues, such as the determination of fair market value,” and that they are “unable to issue a ruling that approves your method of determining the value of the domestic partner health coverage.” The result is that employers are left to grapple with the basic IRS rule for FMV determinations of fringe benefits that is “determined on the basis of all the facts and circumstances” based on “the amount that an individual would have to pay for the particular fringe benefit in an arm's-length transaction.”

Employers typically use one of these two approaches to assess the FMV of domestic partner health coverage:

1. Incremental Cost (More Common): This approach looks to the incremental cost of adding coverage for an individual to the plan to determine the FMV of such coverage. For example, if the premium for employee-only coverage is $300, and the premium for employee + spouse/DP coverage is $475, the FMV for the DP’s coverage would be $175. No IRS guidance addresses whether this approach is permitted, but its common adoption as the industry standard practice suggests its general acceptance.

2. COBRA Rate (Less Common): This approach looks to the plan’s COBRA premium for the applicable tier of coverage, excluding the 2% administrative fee. For example, an employee covering the domestic partner only would base the FMV on the employee-only COBRA rate, whereas an employee also covering the domestic partner’s children would base the FMV on the employee + family COBRA rate. This approach is generally viewed as the more conservative approach because it typically results in a higher imputed income amount than the incremental cost approach.

Bottom Line: There is no set way the IRS clearly requires an employer to use to determine the FMV of domestic partner imputed income. Employers often rely on their payroll provider’s or consultant’s calculation of the FMV, which often follows the incremental approach above. There are also multiple ways to apply the incremental approach to determine FMV, which can lead to somewhat different calculations by different vendors. Given that there is inherent flexibility in this FMV determination, these common differences in imputed income calculation outcomes between vendors (e.g., payroll provider vs. consultant) should not be a cause for concern.

Imputed Income Difference for Certain State Registered Domestic Partnerships
State income tax law in some states (e.g., California) treats state Registered Domestic Partners (RDPs) in the same manner as spouses for tax purposes. This means there are no adverse tax consequences—at the state income tax level only—for RDP coverage in these states. For example, a California employee enrolling their RDP in the health plan is not subject to California state imputed income for the RDP’s health plan coverage.

Federal tax law does not recognize RDPs in the same manner as a spouse. Accordingly, federal imputed income will still apply for a RDP’s health coverage—unless the RDP is a tax dependent under Internal Revenue Code §152 (as modified by §105(b)), per the rules outlined above.

RDP status in certain states therefore creates the following dichotomy for imputed income purposes:

1. Federal Income Tax—Unaffected by RDP Status: The employee is still subject to imputed income for the FMV of the health coverage provided to the RDP.

2. State Income Tax—No Adverse Tax Consequences: In states (including California) that provide tax-advantaged treatment for RDPs, the employee is not subject to imputed income for the RDP’s health coverage for state income tax purposes only.

Tax Consequences of Domestic Partner Health Plan Coverage: Employee-Facing Summary
The following is a short summary of these imputed income tax rules for employee communication pieces:

Please be aware that the Company is required by applicable tax law to treat domestic partner health plan coverage as taxable in the following manner:

• After-Tax Payment: Your employee-share of the premium for your domestic partner’s health plan coverage will be withheld from your paycheck on an after-tax basis; and

• Imputed Income: You will receive imputed income (additional taxable income) for the fair market value of the cost of coverage that is paid by the Company for your domestic partner’s health plan coverage.

There are two ways that you may avoid some or all of these adverse tax consequences for your domestic partner’s coverage health plan:

1. Tax Dependent—Avoids Federal and State Income Taxes:

   If you certify that your domestic partner qualifies as your tax dependent under Internal Revenue Code §152 (as modified by §105(b)), you will avoid both adverse tax consequences listed above at the federal and state income tax level.

2. Registered Domestic Partnership—May Avoid State Income Taxes:

   If you certify that your non-tax dependent domestic partner is a state Registered Domestic Partner (RDP), your RDP’s coverage may avoid the adverse tax consequences above for state income tax purposes only. Whether your RDP’s health coverage qualifies for this preferred state income tax treatment depends on your state of residence. The adverse tax consequence described above still apply for federal income tax purposes.

We recommend that you consult with your personal tax advisor if you have any questions about your domestic partner’s status or these domestic partner health plan coverage tax rules that the Company must follow.

Relevant Cites:

IRC §105:
(b) Amounts expended for medical care.
Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in section 213(d) ) of the taxpayer, his spouse, his dependents (as defined in section 152 , determined without regard to subsections (b)(1) , (b)(2) , and (d)(1)(B) thereof), and any child (as defined in section 152(f)(1) ) of the taxpayer who as of the end of the taxable year has not attained age 27. Any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of this subsection.

Treas. Reg. §1.106-1:
(a) The gross income of an employee does not include the contributions that the employer makes to an accident or health plan for compensation (through insurance or otherwise) to the employee for personal injuries or sickness incurred by the employee, the employee's spouse, the employee's dependents (as defined in section 152 determined without regard to section 152(b)(1), (b)(2), or (d)(1)(B)), or any child (as defined in section 152(f)(1)) of the employee who as of the end of the taxable year has not attained age 27.

IRS PLR 9717018:
Based on the information submitted, representations made, and authorities cited above, and assuming that the Domestic Partners and their dependents do not qualify as spouses or dependents (under section 152(a)) of eligible employees, we conclude as follows:

…

(3) Medical, hospitalization, dental and prescription drug benefits provided to Domestic Partners and their dependents under the Plan will not be excludable under section 106 of the Code, but will be includible in the gross income of the eligible employee as compensation for services under section 61 of the Code.
(4) Pursuant to the provisions of section 104(a)(3) of the Code, neither the eligible employee, nor the eligible employee's Domestic Partner and dependents will include any amount received as payment or reimbursement of medical, hospitalization, dental and prescription drug benefits under the Plan to the extent that either the coverage for personal injuries or sickness provided to the Domestic Partner and dependent was paid for by employee contributions, or the fair market value of the coverage was included in the gross income of the employee.

IRS Information Letter 2016-0008; IRS Information Letter 2016-0012:
For purposes of the section 106 exclusion, a domestic partner is not a spouse. However, an employer can exclude health coverage for an employee’s domestic partner from an employee’s income if the domestic partner qualifies as a dependent of the employee. Generally, to qualify as a dependent for this purpose, an individual must meet the following four conditions:

• He or she is not a qualifying child of any taxpayer.

• He or she is a citizen, national, or legal resident of the United States or a resident of a contiguous country.

• He or she is a member of the employee’s household for the full tax year.

• He or she receives more than half of his or her support from the employee.

These are long-standing rules and are not related to any recent change in federal law or IRS position.

IRS PLR 200108010:
Under section 4.02(1) of Rev. Proc. 2000-3, 2000-1 I.R.B. 103, 111, this office does not ordinarily rule on fact issues, such as the determination of fair market value. Accordingly, we are unable to issue a ruling that approves your method of determining the value of the domestic partner health coverage.

Treas. Reg. §1.61-21:
(b) Valuation of fringe benefits.
…
(2) Fair market value. In general, fair market value is determined on the basis of all the facts and circumstances. Specifically, the fair market value of a fringe benefit is the amount that an individual would have to pay for the particular fringe benefit in an arm's-length transaction.

IRS FAQ for Domestic Partnerships:
Q8. Is a registered domestic partner the stepparent of his or her partner’s child?
A8. If a registered domestic partner is the stepparent of his or her partner’s child under state law, the registered domestic partner is the stepparent of the child for federal income tax purposes.

IRS PLR 200339001:
Because the domestic partner certification (and annual recertification) contains representations that the support and relationship tests of section 152(a)(9) are met and that the relationship between the employee and domestic partner does not violate local law, Taxpayers may rely upon the domestic partner certification to establish that the domestic partner is a dependent of the employee for the purposes of determining whether the domestic partner medical and dental coverage is subject to Federal income and employment taxes.

ABA JCEB Q/A (2008):
The Service representative indicated that the employer must inquire about whether the covered individuals are dependents to determine the correct amount to report and withhold on with respect to the cost of this coverage.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).