The State of Vermont's marriage law allows individuals to extend healthcare coverage (medical and dental) to a civil union partner or same-sex spouse and his/her dependents. By law, this coverage extension is exempt from Vermont state income tax, but not from federal income tax or Social Security and Medicare tax (since the federal government doesn't recognize same-sex unions). Under Treasury regulations, when an individual extends his/her healthcare coverage to someone who is not their federal tax dependent, that extension of coverage is a fringe benefit—and UVM is required to report the “fair market value” of such a benefit as taxable income ("imputed income") to the employee. (The fair market value is generally the full cost of the University's portion of individual coverage in the plan.)
The Bottom Line: There may be increased tax liability for an employee who extends his/her benefits to cover a same sex spouse or civil union partner (or that partner/spouse's children) who do not meet the IRS tax dependent qualifications. Read the overview below, but see IRS Publication 501 for a full explanation of a "tax dependent," and consult with a professional tax advisor for guidance.
Premium payments for healthcare coverage of a civil union partner or same-sex spouse (and his/her dependent children) will be made in after-tax dollars in accordance with IRS regulations and Vermont tax laws. In addition, the fair market value of the University's contribution for coverage will be considered taxable income to the employee for federal tax purposes (and for state tax purposes if the same-sex spousal equivalent is not a party to a civil union or marriage).
The University of Vermont provides the same benefits package options to same-sex spouses and civil union partners as it does to heterosexual spouses.
To help defray the cost of the increased federal tax liability resulting from electing UVM health insurance for a same sex spouse or civil union partner who does not qualify as a federal tax dependent, the University of Vermont offers a Health Care Stipend to benefits-eligible faculty and staff who enroll in the Same-Sex Health Care Stipend Program.
UVM employees may apply for dependent healthcare benefits for their same-sex spouse or civil union partner and his/her dependent children. In order to qualify for coverage, dependents must meet the eligibility requirements of the University medical, dental, and life insurers. The following summarizes these conditions:
Dependents are considered qualified dependents if they are the spouse, civil union partner, or dependent child of the employee. A spouse or civil union partner will qualify if (i) the marriage or civil union is valid in the jurisdiction in which it was solemnized, and (ii) the marriage or civil union does not violate Vermont law or the express public policy of the State of Vermont.
The University reserves the right to request from the employee, at the employee's expense, an opinion from a qualified attorney attesting to the validity of the marriage or civil union according to the laws of the jurisdiction in which it was solemnized. The University further reserves the right to seek an independent verification of validity of the marriage or civil union, and to require proof of legal responsibility for dependent children.
The University will also extend benefits eligibility, for the first three months of employment, to the same-sex spousal equivalent of a new employee who comes to UVM from another state where civil unions and/or same-sex marriages are not legal. To retain spousal benefits, an employee in this situation must enter into a marriage under Vermont law within three months of employment.
The federal Flexible Spending Account program is designed to allow employees to shelter some of their earnings in order to pay certain unreimbursed healthcare expenses and/or qualified dependent care expenses with pre-tax dollars. Participation requires employment in at least a nine-month position at a minimum of 50% full-time equivalency. Since Federal law does not recognize the union of same-sex partners, the healthcare and/or dependent care expenses of a civil union partner or same-sex spouse (and/or their eligible children) are not reimbursable through a Flexible Spending Account—unless the individual(s) meets the strict requirements of IRS-recognized tax dependents of the employee.
Since 2007, IRS Code has permitted the direct rollover of a deceased employee participant’s retirement account to an individual retirement account (IRA) established on behalf of a designated "non-spouse" beneficiary.* This rollover distribution will not trigger immediate income tax consequences or mandatory tax withholding for the non-spouse beneficiary.
To take advantage of this option, the employee must establish a special Inherited Individual Retirement Account through a bank, with the heading “(Deceased Employee Name) for the Benefit of (Beneficiary Name).”
* Non-spouse here refers to the IRS definition, not to the Vermont same-sex marriage definition.
Note that the information provided here is not intended as tax advice; it is intended rather to alert you to the potential financial ramifications of adding benefit plan coverage for same-sex spouses and civil union partners. The University of Vermont strongly encourages any employee considering the benefit plan enrollment of his/her same sex spouse or civil union partner—or their spouse's or partner's children—to consult a qualified tax professional for guidance.