Domestic Partner Benefits: The Hidden Costs Affecting LGBT Employees
Many businesses are finally recognizing the value of diversity and equality in the workplace. As a result, by offering domestic partner health benefits, companies are attracting many qualified LGBT employees. The Human Rights Campaign (HRC) reported roughly 58% of Fortune 500 companies offer domestic partner benefits for same-sex couples, and while these companies are to be praised for their progressive efforts, many remain oblivious to the negative tax implications stemming from domestic partner benefits.
Under Federal Law, employer-provided domestic parter health benefits fall within the ambit of taxable income. An LGBT employee must pay tax on the value of benefits received by their non-dependent domestic partner, a tax that married heterosexual employees are exempt from. The following example illustrates how the added value is computed into the LGBT employee’s taxable income:
A single employee, an employee with a domestic partner, and a heterosexual married employee all earn an annual salary of $30,000. Their employer contributes $6,000 in benefits to the single employee and $10,000 in benefits to both the employee with a domestic partner and to the heterosexual married employee. Neither the $6,000 contribution to the single employee nor the $10,000 contribution to the heterosexual married employee is included in taxable income, thus both employees’ taxable income remains at $30,000.
However, the employee with a dependant domestic partner must pay taxes on an additional $4,000 of income to his previously mentioned counterparts. This $4,000 is the value of the benefit received by his or her domestic partner,thus, the employee with a domestic partner ends up with a taxable income of $34,000. This employee must now taxes based on an artificially inflated income while his counterparts enjoy the same benefits with no adverse tax implications.
A study conducted by the Williams Institute and Center for American Progress has shown that employees who elect to include their domestic partner under their health benefit plan pay on average $1,069 more a year in taxes than heterosexual married employees with the same benefits. Employers providing the benefits pay a collective total of $57 million per year in additional payroll taxes.
The Human Rights Campaign (HRC) is presently advocating the government’s passing of the Tax Equity for Health Plan Beneficiaries Act (TEHPA). If passed, the act would end the taxation of employer- provided health benefits to any beneficiary under the employee’s coverage. TEHPA was written specifically with non-dependent domestic partners in mind. Until the act is passed, however, companies are faced with dilemma of not only whether or not to afford their LGBT employees domestic partner benefits, but also whether or not to cover the additional tax liabilities that are subsequently imposed.
In 2010, Google, a company known for providing its employees with a number of fringe benefits, decided to attack this unequal tax treatment by providing extra compensation to cover those facing the domestic partner tax. This practice, known as “grossing up”, undoubtedly costs Google money, but Google executives insist the company is more interested in doing the right thing than in saving money. Google is not the only company to address the situation, and as businesses become increasingly aware of the unequal tax treatment imposed on its LGBT employees, Google will certainly not be the last.