Imputed income is the value of any non-cash benefit or income an employee receives that is not part of their regular wages. Imputed income arises in the instance of the provision of certain employee benefit plan operations. Upon receipt, the recipient must be taxed on the fair market value of the underlying benefits, even though they are not “paying” for the benefit in the traditional sense. For tax purposes, employers must add the fair market value of these benefits to the employee’s income. This generally occurs when an employer provides life insurance over $50,000, as well as in the event a domestic or civil union partner, or the child or a domestic or civil union partner, is permitted to enroll in an employer sponsored health or welfare plan.
Employer Action Items
- Review plans to ensure they clearly articulate benefits available to domestic and civil union partners, as well as for the benefit of the children of domestic and civil union partners, including the terminology the plan utilizes to define the particular dependent scenario.
- Ensure that the Summary Plan Description provides eligibility rules for domestic and civil union partners, the children of domestic and civil union partners, as well as the actual scope of benefits and coverage.
Summary
Employers may offer enrollment in certain tax-qualified arrangements respecting the civil union or domestic partner of an actively eligible employee (up to and including the children of such domestic or civil union partner). Typically, available employee benefits include medical, dental, vision and life insurance coverage.
Cafeteria plans (regulated under Section 125 of the Internal Revenue Code) and self-funded health plans (regulated under Section 105(h) of the Internal Revenue Code) may offer qualifying employees and their eligible spouses and dependents (under the age of 27) enrollment eligibility. Pursuant to Internal Revenue Code Section 105(b), a “dependent” includes only those individuals who qualify as an employee’s federal tax dependent; however, a domestic partner may not qualify as an employee’s federal tax dependent. This means contributions made on behalf of non-qualifying domestic partners and non-qualifying dependents may not be made on a pre-tax or “tax qualified” basis. Instead, contributions associated with the participation of domestic and civil unions partners (as well as for their non-qualifying children) must then be imputed as income to the employee. Oftentimes, this also includes the value of the underlying benefits received, as well.
The employer is required to report and withhold taxes on the fair market value of a domestic or civil union partner’s health coverage (as well as that of any child enrolled as the dependent of the domestic or civil union partner) for which payment is made by the employer. However, in the instance of a legal spouse or their child, such imputation of income would be excused. The IRS has not provided a specific definition for imputed income; however, the agency has authored several private letter rulings, as well as other sub-regulatory guidance, providing that imputed income must constitute a reasonable approximation of the value of such coverage.
Imputed income implications may also arise in the context of group term life insurance offerings. It is important to note that group term life insurance for an employee is excludible to a certain limit. Specifically, if the employer paid benefit available to the employee exceeds $50,000.00, it will be taxable. Note that employer paid spousal or dependent life insurance over $2,000.00 is also fully taxable.
Additional Resources
- https://www.irs.gov/pub/irs-drop/n-05-42.pdf
- https://www.irs.gov/pub/irs-drop/rr-03-102.pdf
- https://www.irs.gov/government-entities/federal-state-local-governments/group-term-life-insurance
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