This information does not constitute tax advice. Consult your tax advisor for specific guidance regarding federal and state income tax.*
State of Wisconsin provisions allow state employees, including University of Wisconsin employees/appointees, to add a domestic partner, a partner's child and/or an employee's adult child up to age 26 to their health insurance. Adding a non-tax dependent to your health insurance coverage may have tax consequences.
You are responsible for determining the tax dependent status of dependents when you add them to your health insurance coverage. Consult IRS Publication 501 and IRS Notice 2010-38 for tax dependent guidelines and tests, or speak with a tax advisor. Use the "Tax Dep?" column in Section 3 on the Health Insurance Application/Change Form, ET-2301 to indicate if a dependent is a tax dependent. If you're married to your same-sex domestic partner, please complete the Tax Status Verification of Marriage Form, UWS-55a.
Recent federal legislation amended IRS provisions to remove the taxable fringe benefit requirement for an employee's child who has not attained age 26 as of the end of the taxable year. Please see the Adult Children up to Age 26 section below for information about this change.
If you add a dependent to your health insurance coverage who does not qualify as a tax dependent under the Internal Revenue Code Section 152 and Notice 2010-38, the Fair Market Value (FMV) of the UW contribution toward that coverage is considered a taxable fringe benefit, subject to tax withholding. This calculated fringe benefit is known as imputed income. This fringe benefit will increase your taxable income. Therefore, your federal, State, Social Security and Medicare taxes may increase. As a result, your net pay will decrease. Your health insurance premium will continue to be deducted on a pre-tax basis.
Imputed income will have no impact on reported earnings for your Wisconsin Retirement System account, your State Group Life Insurance coverage, or your Income Continuation Insurance coverage.
The following reference tables have been prepared for estimating monthly imputed income based on the FMV for each health plan and the number of non-tax dependents covered. The FMV amounts will be adjusted annually.
The imputed income calculator will help you estimate the tax implications of extending health insurance coverage to a domestic partner or eligible non-tax dependents. Use the Earnings Statement Legend to locate the values that you need for the imputed income calculation.
Recent federal legislation amended IRS provisions to remove the taxable fringe benefit requirement for an employee's child who has not attained age 26 as of the end of the taxable year, including a child who does not qualify as a tax dependent. Thus, the age limit, residency, support and other tests described in Internal Revenue Code Section 152 do not apply with respect to such a child. For this purpose, a child is defined as the employee's son, daughter, stepchild, adopted child or eligible foster child. Consult IRS Notice 2010-38 for more information.
The State of Wisconsin has not adopted these amended IRS provisions; therefore you will be subject to imputed income for state tax purposes.
Employees with a non-tax dependent child that will attain age 26 by the end of the taxable year, will be subject to imputed income for Federal, State, Social Security and Medicare tax purposes.
The question and answer excerpts below are taken from the Wisconsin Department of Employee Trust Funds (ETF) document, Domestic Partner Benefits, ET-2370. Specific question numbers are referenced. The brackets [ ] indicate a correction or clarification.
A: Under federal tax law, employer contributions for health insurance are excluded from an employee's gross income. However, federal law permits the exclusion only for coverage of the employee, the employee's spouse and the employee's dependents. If your domestic partner is not considered a "tax dependent" under federal law, your employer must include in your gross income the fair market value of the health insurance benefits provided to [your domestic partner]. This is known as “imputed income” and it will likely affect your taxable income and increase your tax liability.
A: In order to be considered a tax dependent, your domestic partner must meet the federal qualifications for a "qualifying relative." Please see IRS Publication 501 or the IRS Form 1040 Instructions, pages 16-19, for more information.
In general, the IRS requires that a “qualifying relative” meet four tests:
The list above should not be used as the sole source of information for determination of your domestic partner's tax status. ETF staff [or UW staff] cannot provide you tax advice. The IRS's tests are described in detail in IRS Publication 501, which is available [from] the Internal Revenue Service. In addition, you should consult with your tax advisor or the IRS if you have questions on how the federal rules apply to your situation.
Note: Any individual who meets the criteria of a “qualifying child” or “qualifying relative” must also meet the definition of "DEPENDENT" under the Uniform Benefits contract to be covered on your health insurance policy. Source: It's Your Choice: Reference Guide (ET-2107r-11), pages 75-76.
*Please Note: The information presented in this material has been prepared to assist you in understanding the tax consequences associated with adding a domestic partner, your partner's child or an adult child to your health insurance. This material attempts to summarize tax provisions and answer questions. No guarantee or contract is created by this material.