Domestic Partner Benefits: Proposal for Grossing Up to Offset Imputed Income Tax
This document is provided as a template proposal for organizations to use when advocating for “grossing up” internally. References to [EMPLOYER] should be replaced with the employer’s name, and content should be reviewed for applicability to the specific employer.
Introduction
[EMPLOYER] provides health benefits to unmarried domestic partners. However, current federal and state tax treatment continues to favor married employees and renders such benefits of less value to similarly-situated unmarried employees.[1] Nationally, unmarried domestic partners pay an average of $1,069 per year more in taxes than their different-sex married counterparts.[2] If [EMPLOYER] is committed to providing equal pay for equal work for all of its employees, it must ensure that, despite governmental discrimination, [EMPLOYER] employees have equivalent post-tax incomes. "Grossing up" is the practice of increasing pre-tax income so that all post-tax incomes are equitable.
Proposal
The employee handbook shall be amended to read:
For employees who enroll their domestic partners under [EMPLOYER]’s health insurance plan and are subject to additional imputed income tax, [EMPLOYER] will gross-up the employee’s salaries to the level where such employees will bear no more tax consequences than married employees who opt to cover their spouses.
Background
Unlike the case for legally different-sex married spouses, the Internal Revenue Code treats the value of domestic partner benefits as taxable, “imputed income” to the employees who elect to receive this benefit.[3] The only exception is if a domestic partner qualifies as a dependant, under IRC 152. Also, contributions by employees toward domestic partner coverage cannot be taken from pre-tax dollars, the way that contributions from legally different-sex married employees can.
Note however, that the taxability of domestic partner health benefits can vary by state jurisdiction. For example, in the District of Columbia, domestic partner health benefits are excluded from taxable salary.[4] Employees who elect to receive domestic partner benefits and who live in DC will have a different taxable income reported on their Form W-2 for state purposes than for federal purposes. However, like the federal government, most states tax the imputed income from domestic partner benefits.
Calculation
As outlined above, there are some instances in which different tax rates and different tax treatment by local jurisdictions cause variability among employees’extra incurred taxes on domestic partner benefits. The extra tax burden can be easily calculated by the following formulas.
Variables:
Single plus one coverage – Single coverage = Imputed Income (ImInc)
Allowed Contribution of pretax dollars for married spouse benefits = Contrib
Federal Tax Bracket[5] of Employee = FTB
State Tax Bracket of Employee = STB [only applies to MD and VA residents]
Formulas:
If employee earns less than $97,500, Extra FICA taxes = .0765 x ImInc = EFICA
If employee earns more than $97,500, extra FICA taxes = .0145 x ImInc = EFICA
Extra Income Tax = (FTB + STB) x (ImInc + Contrib) = EIT
Extra unequal taxes paid by employees for electing DP benefits = EIT + EFICA
Solution
Many companies follow the practice of “grossing up” an employee’s salary when that employee is hit with extra taxes, for whatever reason.[6] The amount of salary “gross up” is also taxed, but it is easily possible to figure out the right amount to gross up so that the employee is covered for additional taxes of the gross up. In other words, a gross up comes out as a tax wash so that the employees do not have to pay the unfair taxes.
How "Grossing Up" Works: An Example[7]
Consider an employer that wants to gross up an employee in the 20-percent tax bracket. The fair market value of the employee’s non-dependent domestic partner coverage is determined to be $200 per pay period.
The employee will incur $40 of tax ($200 x 20 percent) for that pay period. To gross up the employee, the employer would need to make an additional payment of $48 to this employee. Forty dollars of the gross-up amount would serve as reimbursement for the tax incurred on the benefits coverage and the other $8 ($40 x 20 percent) would serve as an approximate reimbursement of the tax paid on the gross-up payment itself.
Note that this example does not include state tax, Social Security (FICA) and Medicare taxes.
[EMPLOYER] should adopt a policy of grossing up the salary of employees who elect to receive domestic partner benefits. Otherwise, [EMPLOYER] will continue to offer unequal benefits to employees based on sexual orientation.
Once this policy of grossing up is adopted, insurance election should again be made available so that those employees who chose not to elect DP benefits because of the unequal taxation will be able to make the choice on an equal footing with straight, legally married employees.
Further Solution
[EMPLOYER] and the firms of the board members should strongly consider joining the Business Coalition for Benefits Tax Equity, a group of leading U.S. employers that support legislative efforts to end the taxation of health insurance benefits for domestic partners and treat them the same as health benefits for federally-recognized spouses and dependents. Current members and information on how to join are available online — http://www.hrc.org/issues/workplace/benefits/6879.htm.
Additional Resources
- Taxation of Domestic Partner Benefits:
http://www.hrc.org/issues/workplace/benefits/4820.htm - Domestic Partner Benefits: Grossing Up to Offset Imputed Income Tax:
http://www.hrc.org/issues/workplace/benefits/grossing_up.htm
[1] Since most employees with unmarried domestic partners, at this time, are gay, lesbian, bisexual, or transgender and employees with legal spouses are generally heterosexual and not transgender, this unequal pay for equal work may create liability for the [EMPLOYER] under certain laws that prohibit discrimination in compensation (e.g.: the D.C. Human Rights Act).
[2] See Badgett, M.V. Lee, Unequal Taxes on Equal Benefits: The Taxation of Domestic Partner Benefits, Center for American Progress and The Williams Institute (2007).
[3] See e.g., IRS Private Letter Ruling 200108010, Nov. 17, 2000.
[4] See D.C. Code § 47-1803.02
[5] This is the upper tax bracket, not the effective tax rate, paid by the employee.
[6] See, e.g., Report of the Bar Association of San Francisco Quality Subcommittee on Lesbian, Gay, Bisexual, and Transgender Issues, Nov. 2007 (listing grossing up among suggested best practices for legal employers); Employee Benefits Security Administration, Department of Labor, Advisory Opinion 2001-05A, June 1, 20010 (describing the grossing-up policy of the Hotel Employees and Restaurant Employees International Union Welfare Fund.).
[7] See Solomon, Todd A., "Domestic Partner Benefits: An Employer’s Guide, 4th edition," Thompson Publishing Group Inc, 2007.
