If we provide health insurance benefits to the domestic partners of employees, must we calculate a value of those health benefits and charge that to the employee?

Yes. If you pay for health insurance for domestic partners or other beneficiaries that are not legal spouses or dependents as defined by the Internal Revenue Service (IRS), you must calculate the estimated fair market value (FMV) of those health benefits and credit that amount to the employee as “imputed income.”

Usually, you only need to calculate this amount at year’s end. You would simply report the value of the benefit as income on the employee’s W-2 for that year. One (expensive) way to arrive at an FMV value that would be acceptable by the IRS is to use a professional actuarial analysis. Another way to arrive at an FMV, even though the IRS doesn’t give thorough guidance on the matter, is to calculate the difference between the cost of employee plus one and the cost of employee only—after deducting what the employee contributes.

Example:

Suppose the monthly premium is as follows.

Employee only = $500.00

Employer share = $375.00

Employee share = $125.00

Employee + one = $1150.00

Employer share = $862.50

Employee share = $287.50

Calculation:

$862.50 - $375.00 = $487.50 (monthly)

$487.50 x 12 months = $5,850.00

Imputed income (for one domestic partner covered) for full year = $5,850.00.