Domestic Partner Benefits: Grossing Up to Offset Imputed Income Tax
The information in this document does not constitute legal advice. For assistance with legal questions specific to your situation, please consult an attorney.
A number of employers have looked to account for the income tax burden of domestic partner benefits by "grossing up" an employee's salary, similar to grossing up award or bonus payments to an employee. This benefit is also sometimes referred to as a "true-up" of the employee's salary. For example, a holiday bonus of $500 would be reported for tax purposes at a greater value so that the employee actually receives $500 after taxes. Employees that are taxed on the imputed value of domestic partner benefits generally must pay those taxes each payroll period.
- Taxation of Domestic Partner Benefits
- Business Coalition for Benefits Tax Equity - a group of more than 70 major U.S. employers that support legislation to end the federal tax disparity
- Taxation of Partner Benefits: Determining and Tracking Dependent Status
Who Grosses Up
Although employers have been interested in implementing a gross up benefit for employees receiving partner benefits since as early as 2001, the HRC Foundation was unable to find a particular employer that had implemented the benefit until 2009.
The HRC Foundation is aware of 40 for-profit employers -- including Accenture Ltd., American Express Co., Apple Inc., Bain & Co. Inc., Bank of America Corp., Barclays Capital, Biogen Idec Inc., Bingham McCutchen LLP, BNP Paribas, Boston Consulting Group, Cisco Systems Inc., Cleary, Gottlieb, Steen & Hamilton LLP, Corning Inc., Credit Suisse USA Inc., Debevoise & Plimpton LLP, Deloitte LLP, Depository Trust & Clearing Corp., Deutsche Bank, Discovery Communications Inc., Ernst & Young LLP, Facebook Inc., Fenwick & West LLP, The Goldman Sachs Group Inc., Google Inc., Kimpton Hotels & Restaurants, KPMG LLP, Marsh & McLennan Companies Inc., McDermott Will & Emery LLP, McKinsey & Co. Inc., Microsoft Corp., Milbank, Tweed, Hadley & McCloy LLP, Morgan Stanley, Morrison & Foerster LLP, Opower, Orrick, Herrington & Sutcliffe LLP, PricewaterhouseCoopers LLP, Simpson, Thacher & Bartlett LLP, Skadden, Arps, Slate, Meagher & Flom LLP, Winston & Strawn LLP and Yahoo! Inc. -- that have instituted a grossing up policy. Furthermore, several large businesses and law firms have indicated they will implement the benefit in 2011. Grossing up is a new area for municipalities as well. At this time, only Cambridge, Massachusetts provides this benefit for city employees.
How "Grossing Up" Works: An Example
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 - $40 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.
This example appears in "Domestic Partner Benefits: An Employer's Guide, 6th Edition." Copyright 2010 Thompson Publishing Group, Inc.
Employers can notify employees of the gross-up benefit through general benefits eligibility documentation available to all employees.
EXAMPLE: Who is eligible for benefits?
All employees regularly scheduled to work 20 or more hours each week are eligible for all benefits. Employees working less than 20 hours per week are eligible to participate in the Retirement Plans and Employee Matching Gifts Program. Coverage will begin on your date of hire. You may enroll your eligible dependents for medical, dental and vision benefits. Dependents are eligible to receive Employee Assistance Program (EAP) services, regardless of enrollment in other benefit plans. Your eligible dependents include:
- Your legal spouse
- Your same- or different-sex partner. To be eligible to enroll in the plans, your partner must meet the criteria outlined under Domestic Partner Eligibility. Any premium contributions made by [EMPLOYER NAME] on behalf of a non-dependent partner are considered taxable income. However, [EMPLOYER NAME] pays for the tax impact on your behalf; therefore, there is no impact to your net pay. Payroll will gross-up your salary for the value of the insurance provided to your domestic partner. As a result, your gross wages reported on your regular pay stub and in Box 1 of your W-2 will be higher by the amount of the insurance (including the gross-up).
- Your unmarried children (or step children in your custody) up to the age of 25 who depend on you for support (this includes your partner's children)
- Any dependent child who is incapable of self-support because of a physical or mental disability.
Sample Proposal for Grossing Up
Use this sample proposal as a guide when advocating for your own employer to implement grossing up as a standard for employees enrolled in domestic partner benefits that pay an additional imputed income tax.