Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
In early June, a bipartisan group of House members led by Congressman Jim McDermott (D-WA) introduced the Tax Parity for Health Plan Beneficiaries Act of 2011 (H.R. 2088), which would extend the income tax exemption for employer-provided health care benefits to domestic partners and other non-spouse dependents of covered employees. According to a press release issued by Congressman McDermott’s office, employees who enroll a domestic partner or non-spouse dependent pay an average of $2,000 more in federal taxes annually because current tax law does not exclude the amount paid for health benefits from their taxable income or wages. Companies are also penalized because they must pay higher payroll taxes for these employees.
H.R. 2088 would negate the Defense of Marriage Act (DOMA) for the limited purpose of making the cost of employer-provided health care to domestic partners and same-sex spouses exempt from income taxation on the same basis as for opposite-sex spouses. Principally, the bill would (i) allow employer contributions toward premium payments (or self-insured coverage) to be made tax-free to the employee, and (ii) allow employees to pay for their share of coverage in a tax-free manner. The bill does not directly amend DOMA or even mention it, but makes amendments only to the relevant sections of the Internal Revenue Code. Technically, the bill would extend the tax exemption to an “eligible beneficiary,” defined as any person permitted to be covered as a dependent under an employer-provided accident or health care plan, without regard to their relationship to the covered employee. The bill includes conforming changes to the tax treatment of flexible spending accounts, benefits under a VEBA, employment tax exclusions, health coverage deductions for self-employed individuals, health savings accounts, and medical benefits under Code Section 401(h) plans.
A recent Wall Street Journal article put the current tax disparity in perspective with this example: a man with a salary of $50,000 whose wife is on his health care plan and receives $10,000 worth of health care benefits will pay income taxes based only on that $50,000. However, a man in a domestic partnership (or a same-sex marriage recognized only by the state in which he lives) will have to pay federal taxes on the full $60,000. Not only will the Company he works for owe more payroll taxes on the higher sum, but it will also be burdened by having to (i) calculate the portion of its health care contribution, and (ii) create and maintain a separate system for the income tax withholding and payroll tax obligations for such employees.
Congressman McDermott, who first introduced the bill in 2001, argues in support of the legislation:
It’s wrong to punish American companies for doing the right thing – more than 80% of America’s 100 most successful companies are recognizing employee diversity and providing more inclusive health plans, and they shouldn’t be penalized for this... This legislation would not only end unfair tax treatment of employees, but also help keep American businesses competitive.
In a recent letter (pdf) a coalition of 77 companies expressed strong support for the bill. The Business Coalition for Benefits Tax Equity wrote that companies are increasingly providing health benefits to domestic partners, adult children, and/or grandchildren in an effort to attract and retain qualified employees. However, in their view, “federal tax law has not kept pace with corporate change in this area, and employers that offer such benefits and the employees who receive them are taxed inequitably.” On June 9, 2011, Senator Charles Schumer (D-NY) introduced similar legislation in the Senate (S. 1171). Given the current political climate, it is not clear whether the legislation will be approved, but supporters appear buoyed by the fact that the measure was almost passed as part of last year’s health care reform law.
On the same day that Senator Schumer introduced his bill, the Boston Globe reported that Cambridge, Massachusetts is preparing to pay quarterly stipends to city employees in same-sex marriages to help defray the cost of the federal tax burden on health benefits. While a number of companies already offer similar stipends, Cambridge is believed to be the first municipality in the country to do so. In support of the change, set to take effect in July 2011, Cambridge’s Mayor stated: “[t]his action is the right and fair thing to do until the federal government addresses this issue.” If the bipartisan group of lawmakers in Washington have their way, the federal government may soon reverse course on taxation of health care benefits for domestic partners and non-spouse dependents.