Under current Internal Revenue Service rules, the value of the contribution UC makes toward the cost of medical coverage provided to certain family members who are not an employee’s or retiree’s tax dependents may be considered imputed income that will be subject to federal income taxes, FICA (Social Security and Medicare), and any other required payroll taxes. In some cases, they may also have imputed income for California state income tax purposes.
Federal Income Tax (Including FICA)
For federal income tax purposes, they will have imputed income for UC’s portion of the cost of coverage provided to their same-sex spouse, domestic partner and/or the spouse’s or partner’s children unless these family members are their tax dependents. They will also have imputed income for coverage provided to any grandchildren of their spouse/domestic partner if the grandchildren are not their tax dependents.
Changes under Federal Health Reform
Under a 2010 change in federal tax law, they will not have federal imputed income for coverage provided to their natural or adopted children and/or step-children who are the children of their opposite-sex spouse, even if the children are not their tax dependents.
NOTE: As of December 2010, the State of California has not passed legislation conforming to this change, so employees and retirees may continue to have California imputed income for these children if the children are not their tax dependents. Also, although UC health plan coverage has been extended for eligible children up to age 26 beginning in 2011, California has not passed legislation treating coverage provided to any children between ages 23 and 26 as excludable from income. As a result, California imputed income may apply for coverage provided to these “adult children” regardless of whether it applies under federal law.
California State Income Tax
If coverage is provided to their same-sex spouse, they will not have California imputed income if they were married in California between June 16, 2008 and November 4, 2008 or were married at any time outside of California in another jurisdiction where the marriage is valid.
They will not have California imputed income for coverage provided to their domestic partner if the domestic partnership has been registered with the state of California. If the domestic partnership has not been registered with the state of California, California imputed income will apply; however, if they have entered into a valid same-sex union, other than a marriage, in another jurisdiction, and California recognizes that union as substantially equivalent to a California registered domestic partnership, they may be able to exclude the imputed income from state taxation when they file their state tax return.
California imputed income will apply for covered children or grandchildren of their spouse or domestic partner if the children are not their tax dependents.
Forms and Procedure
If employees have submitted form UPAY 850 and retirees have submitted form UBEN 100 indicating that they have a same-sex spouse or that they and their domestic partner are registered in California, they will not have California imputed income for their spouse’s or partner’s coverage. Any out-of-pocket premium cost for medical coverage for their spouse or partner will be deducted from their pay/retirement benefit on a pretax basis for California income tax purposes. For federal tax purposes, they will have imputed income and the out-of-pocket premium cost must be paid on an after-tax basis.
To estimate imputed income and the estimated tax on that income, use the worksheet and chart below.