D OMESTIC PARTNER AND PRE-TAX HEALTH C OVERAGE.

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1 No. 63 September 2005 D OMESTIC PARTNER AND PRE-TAX HEALTH C OVERAGE. INSIDE THIS ISSUE: Domestic Partner and Pre-Tax Health Coverage Sample Declaration of Same-Sex Domestic Partnership Form Sample Declaration of Tax Status Form Worksheet for Determining Dependent Status Can your employees pay pre-tax for Domestic Partner health coverage under your Cafeteria Plan? In most cases, probably not. But if your Plan Documents are drafted appropriately and the Domestic Partners qualify as the employees' tax dependents under the IRS Code (many Domestic Partners will not qualify) then Domestic Partner coverage may be paid on a pre-tax basis. Under Code Sections 105, 106, and 125, as amended by the Working Families Tax Relief Act of 2004 (WFTRA) and other IRS guidance, a Cafeteria Plan can only offer health benefits on a pre-tax basis for someone who is a spouse or a tax dependent. Because of administrative hassles and complex tax issues, some employers might not wish to offer any benefits to Domestic Partners unless they are offered on an after-tax basis. An opposite-sex Domestic Partner can be a spouse for purposes of your Cafeteria Plan if he or she is recognized as a spouse under state law. But a same-sex Domestic Partner cannot be a spouse for this purpose because federal law provides that a spouse only includes a person of the opposite-sex who is a husband or wife. (This same federal law prevents a same-sex spouse from being considered a spouse for tax purposes even where same-sex marriage is allowed under state law.) Consequently, a same-sex Domestic Partner cannot be a spouse for purposes of your Cafeteria Plan. A Domestic Partner (same-sex or opposite-sex) who doesn t qualify as an employee s spouse might still qualify as the em- 1

2 DOMESTIC PARTNER AND PRE-TAX HEALTH COVERAGE (CONTINUED) ployee s tax dependent. Generally, to qualify as a tax dependent, a Domestic Partner must be a qualifying relative of an employee. To be a qualifying relative, the Domestic Partner must meet the following requirements: (1) have the same principal place of abode as the employee for the entire calendar year; (2) be a member of the employee s household for the entire calendar year (the relationship must not violate local law for example, some local laws prohibit cohabitation by unmarried partners); (3) receive more than half of his or her support from the employee; (4) not be the employee s (or anyone else s) qualifying child under Code Section 152; and (5) be a U.S. Citizen, U.S. National of the U.S., or a resident of the U.S., Canada, or Mexico. Note: Domestic Partners who would ordinarily not be tax dependents for purposes of the dependency exemption under Code Section 152 [dependents of the employee s dependent; married dependents filing a joint tax return; and individuals whose gross income exceeds the exemption amount ($3,200 for taxable years beginning in 2005)] can still obtain health coverage on a tax-free basis under a Cafeteria Plan that is, they can still be tax dependents for health coverage purposes. If your company offers Domestic Partner Insurance coverage at 100%, unless that partner is a code Section 152 dependent, the entire premium is added to the employee s W-2 as imputed income. If the company has a premium conversion plan, where part of the premiums are deducted from the employee s check, none of the Domestic Partner s premiums can be deducted pre-tax (unless they are a Code Section 152 dependent and the employer allows such participation). If your company chooses to offer Domestic Partner coverage (or is required to under a contract), steps should be taken to verify that a Domestic Partner is truly a Domestic Partner. A Declaration of Domestic Partnership form should be created. A good model form is included here. Before a company offers Cafeteria Plan coverage for Domestic Partners, they should obtain a Declaration of Tax Status from their employee that certifies that the Domestic Partner is indeed a Code Section 152 dependent, and that the employee is entitled to a pre-tax deduction for insurance, and/or other benefits received under a Cafeteria Plan. Employees may find this certification intrusive, but it is necessary to protect the Cafeteria Plan from disqualification. If a Domestic Partner who is not a Code section 152 dependent were allowed to be covered under Section 125 plan, this would disqualify the plan. If the Domestic Partnership were to end during the plan year, there are other complex tax issues to be aware of, if the benefits were offered under a Cafeteria Plan. Any previous employer provided insurance that had been offered pretax would have to be added back to that employee s W-2 income. Anything deducted 2

3 No. 63 pre-tax, would have to be converted to after-tax. The employer should take steps to be certain the employee notifies him of any changes in the Domestic Partnership arrangement. The enclosed affidavits are good examples after which a Cafeteria Plan Sponsor may wish to model their forms, if considering offering Domestic Partner coverage, either inside of or outside of the Cafeteria Plan. 3

4 Declaration of Same-Sex Domestic Partnership I,, certify that and I Print Subscriber s Name Print Same-Sex Domestic Partner s Name established a same-sex domestic partnership beginning / / and we meet the following month/day/year criteria of same-sex domestic partnership: 1. We have been same-sex domestic partners continuously for a minimum of six months. 2. We share the same regular and permanent residence. 3. We have a close personal relationship in lieu of a lawful marriage. 4. We have agreed to be jointly responsible for basic living expenses 1, as defined below, incurred during the domestic partnership. 5. We are not married to anyone. 6. We are each eighteen (18) years or older. 7. We are not related by blood as close as would bar marriage. 8. We were mentally competent to consent to a contract when the domestic partnership began. 9. We are each other s sole domestic partner and are responsible for each other s common welfare. 10. We are same-sex partners who are barred from lawful marriage. 1 Basic living expenses means the cost of basic food, shelter and any other expenses of the common household. You and your same-sex domestic partner need not contribute equally or jointly to the payment of these expenses as long as it is agreed that both are responsible for them. If requested, you should be able to provide at least three of the following as verification of your joint responsibility (information should be dated to confirm eligibility at time of enrollment). Joint mortgage or lease Designation of the same-sex domestic partner as primary beneficiary for a life insurance or a retirement contract. Designation of the same-sex domestic partner as primary beneficiary in the employee/covered member s will. Durable power of attorney for health care or financial management. Joint ownership of a motor vehicle, a joint checking account, or a joint credit account. A relationship of cohabitation contract which obligates each of the parties to provide support. Subscribers are advised to consult an attorney regarding the possibility that the filing of this declaration may have other legal and/or financial consequences, including the fact that it may, in the event of the termination of the domestic partnership, be regarded as a factor leading a court to treat the relationship as the equivalent of marriage for the purposes of establishing and dividing community property, assigning community debt, and for the payment of support. It is understood that: This declaration shall be terminated upon death of the same-sex domestic partner or by change of circumstance attested to in this declaration. Employees will notify if the domestic partnership no longer meets all of the criteria attested to in this declaration within thirty (30) days of a change. We declare, under penalty of perjury, that the forgoing information provided by us is true and correct and that all provisions of this statement have been met. - - Subscriber s Signature Social Security Number Date - - Same-Sex Domestic Partner s Signature Social Security Number Date 4

5 Declaration of Tax Status I,, have completed a Declaration of Same-Sex Domestic Partnership form and have sworn that Print Subscriber s Name Print Same-Sex Domestic Partner s Name is my same-sex domestic partner. I understand that my employer has a legitimate need to know the federal income tax status of my relationship. I understand that a same-sex domestic partner is considered an Internal Revenue Code (IRC) Section 152 dependent only if each of the following requirements is met (does not affect your same-sex domestic partner s eligibility for coverage): 1. The same-sex domestic partner and I have lived together (share our principal abode) for the full taxable year, except for temporary absence for reasons such as vacation, military service, or education. In other words, my same-sex domestic partner and I must live together from January 1 through December The same-sex domestic partner is a citizen or resident of the United States. 3. The same-sex domestic partner receives more than half of his or her support from me. The rules for determining support are complicated and are more involved than just determining who is the primary breadwinner. Attached is a worksheet similar to one the Internal Revenue Service (IRS) includes in its Publication 17 that you can use to determine whether you provide more than half of your same-sex domestic partner s support. Please Note: Even if the above requirements are met, an individual cannot be considered an IRC Section 152 dependent if the relationship violates local law. Check one of the following boxes; coverage is only available if you check a box. Since the above is a summary of complex tax rules, we recommend you consult with your tax advisor regarding your specific circumstances. I declare that: Yes, my same-sex domestic partner is my Internal Revenue Code Section 152 dependent. No, my same-sex domestic partner is not my Internal Revenue Code Section 152 dependent. As a result, premium contributions for my same-sex domestic partner and his or her eligible family members cannot be taken on a pre-tac basis (under IRC Section 125), and the fair market value of the benefits my employer provides for my partner will be added to my taxable income. By signing below, you are stating that: I understand that this information will be held confidential and will be subject to disclosure only upon my express written authorization or if otherwise required by law. I understand that this declaration of responsibility may have legal implications under federal law. I understand that a civil action may be brought against me for any losses, including reasonable attorney s fees, because of a false statement contained in this Declaration of Tax Status. I also certify under penalty of perjury, under the laws of the state of, that the foregoing is true and correct. I, the undersigned subscriber, understand that willful falsification of information on this declaration may lead to disciplinary action, up to and including discharge from employment and/or disenrollment from coverage. I agree to notify if there is any change in the circumstances attested to in this declaration within thirty (30) days of the change. I am aware that any change in my family tax status may directly impact the calculation of my taxable income. - - Subscriber s Signature Social Security Number Date 5

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7 If line 22 is not more than line 23, check No on the Declaration of Tax Status form. As a result, the premium for your same-sex domestic partner and/or child(ren) is considered taxable by the IRS and must be paid on an after tax basis. In addition, the amount, if any, that pays towards Name of Employer coverage for your same-sex domestic partner and/or his or her dependent child(ren) will be added to your total gross income and calculated into your withholding tax; this will be reflected on your pay stub, as well as your Wage and Tax Statement (your W-2). 7