Overview

In general, employee benefit plans enjoy favorable tax benefits. Specifically health benefits provided to you and your eligible dependents are generally tax free (subject to certain limitations for life insurance benefits). That said, there are a number of taxation nuances to be aware of. 

Domestic Partner Taxation

Whether or not your plan offers coverage for Registered Domestic Partners or Non-Registered Domestic Partners may be found under the eligibility criteria of each Certificate of Coverage. However, it should be noted that tax treatment of employee benefits is not the same for domestic partners. Unless your domestic partner and/or his or her children, if any, are considered your federal tax dependents under the Internal Revenue Code for health benefits, the Internal Revenue Service currently requires that your employer impute income to you equal to the value of the coverage provided for your domestic partner and his or her dependent children. You are advised to consult with your tax advisor to determine if your domestic partner and his or her dependent children are your federal tax dependents and to review the tax consequences of electing coverage for a domestic partner. Also, please speak to your tax advisor regarding whether your domestic partner, and his or her children, if any, may qualify for special state tax treatment.

Same-Sex Marriage Tax Implications

The US Department of the Treasury and the Internal Revenue Service (IRS) have ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. This ruling applies regardless of whether you live in a jurisdiction that recognizes same-sex marriage or not. If your dependent is a same sex spouse pursuant to the above, his/her benefits are excludable from income. 

Life Insurance

The value of employer-provided life insurance benefits in excess of $50,000 will be imputed income to you as required by the IRS. The actual value of the life insurance depends on your age and the amount of insurance in excess of $50,000. The imputed income may be added to your income each pay period or it may be added in a lump sum at the end of the calendar year. 

Disability Insurance

Whether disability insurance benefits are taxable depends on whether taxes were paid on the monthly premiums. If your employer paid the premiums (and you did not pay taxes on the premiums), then the benefits upon disability will be taxable to you. Conversely, if you paid taxes on the disability premiums on a monthly basis (either by making after tax contributions or by having your employer impute the value of the premium to your income), then the plan benefits paid to you upon disability will be tax free. 

Critical Illness and Indemnity Policies

Premiums for critical illness and indemnity policies are generally tax deductible. Upon filing a claim on a critical illness or indemnity policy, the benefits will be tax free to the extent that they reimburse you for otherwise unreimbursed (out-of-pocket) medical expenses incurred. Any excess policy payments over your out of pocket costs will be taxable to you. 

Tax Qualification

In general, benefits provided under an employer sponsored benefits plan are intended to qualify as a health and welfare benefits that meet the requirements for qualification under Code Section 79, Section 105(b) and Section 106(a). Benefits paid to employees under such plans are intended to be excludible from gross incomes by virtue of Section 79, Section 105(b) and Section 106(a).