by Elizabeth A. Savard, Todd A. Solomon and Brian J. Tiemann
The Illinois Department of Revenue recently issued guidance reversing its position on the state income tax treatment of benefits for non-dependent civil union partners.
Federal law excludes amounts that an employer pays toward medical, dental or vision benefits for an employee and the employee’s spouse or dependents from the employee’s taxable income. However, because civil union partners are not recognized under federal law, employers that provide these same benefits to employees’ civil union partners must impute the fair market value of the coverage as income to the employee that is subject to federal income tax, unless the civil union partner otherwise qualifies as the employee’s “dependent” pursuant to Section 152 of the Internal Revenue Code.
The Illinois Department of Revenue previously indicated that Illinois would follow the federal approach in taxing the fair market value of employer-provided coverage for non-dependent civil union partners because state law did not provide an exemption from such taxation. However, recent guidance issued by the Department of Revenue reverses that position and indicates that employer-provided benefits for a non-dependent civil union partner are now exempt from Illinois state income taxation. Illinois civil union partners are directed to calculate their state income taxes by completing a mock federal income tax return as if they were married for purposes of federal law.
In addition, for federal tax purposes, employees may not make pre-tax contributions to a Section 125 cafeteria plan on behalf of a non-dependent civil union partner (i.e., contributions for the partner generally must be after-tax) and may not receive reimbursement for expenses of the non-dependent civil union partner from flexible spending accounts (FSAs), health reimbursement accounts (HRAs) or health savings accounts (HSAs). However, for Illinois state tax purposes, the employee now can be permitted to pay for the non-dependent civil union partner’s coverage on a pre-tax basis.
Employers providing medical, dental or vision benefits to civil union partners residing in Illinois should take action to structure their payroll systems to tax employees on the fair market value of coverage for employees’ non-dependent civil union partners for federal income tax purposes, but not for state purposes.