Help me understand imputed income for a domestic partner's insurance
January 13, 2017 11:10 AM   Subscribe

I think I made a bad decision out of ignorance of the consequences of adding my domestic partner to my health insurance coverage in NYC. I am in potentially big financial trouble because of this, but before I deal with it, I want to make sure I understand what's going on. Can you help me understand how a very low premium has turned into an enormous chunk out of my paycheck--and what happens when I file my tax returns?

My domestic partner lost her job/insurance around the time of open enrollment for my company's health plan. I saw that the premium for adding a domestic partner to my coverage was only $64 per bi-weekly paycheck, so I added her during open enrollment. I got my first paycheck of the year today, and was fairly shocked to see that it was over $200 lower than my paychecks last year.

I'll give some numbers. I make about $52,000 a year in NYC. After taxes, my take-home pay used to be about $1400 every two weeks; now it is about $1200. In addition to the $64 premium for my domestic partner's coverage, it looks like they're adding $344 imputed income, which is then being taxed. So I think I understand what's happening here: they're taxing the value of my DP's health insurance as though it is income, then subtracting the imputed income from net pay and keeping the tax. Since $344 is roughly 20% of my gross biweekly pay, my federal/state/city taxes are much higher paycheck-to-paycheck. Do I understand the situation correctly?

If so, it's pretty shocking to me, but I assume I just fell victim to my own ignorance. The $128 monthly premium we thought we were signing up for amounts to a $400 monthly change in take-home pay, which our household cannot afford under any circumstances. I'm not sure what I'm going to do.

Here's my other question: since this difference in take-home pay is mostly from new taxes, what should I expect on my 2017 annual tax returns, compared to other years? Can I expect to get more back than usual? Or, on the other hand, will I receive less of a return (if any at all), since the imputed income raises my taxable gross pay pretty substantially? If I end up owing at the end of the year, it's even more of a crisis for us. I just want to understand better what to expect before looking at options.

Thank you so much for your help
posted by scarylarry to Work & Money (14 answers total) 1 user marked this as a favorite
In short, the imputed income comes from what the company pays for the insurance (the employer portion) and you're charged it because your domestic partner doesn't count as a qualified dependent in the eyes of the IRS.

A good breakdown w/ numbers here
posted by k5.user at 11:19 AM on January 13, 2017 [1 favorite]

Came in here to say what k5 did. Easiest way to fix this is to get married, making your partner a qualified dependent.
posted by Oktober at 11:25 AM on January 13, 2017 [9 favorites]

Yes, the "fair market value" of the insurance less whatever premium is paid counts as "imputed income" to you. It sounds as if the withholding now reflects that, so you should not anticipate a higher tax bill unless adding in the imputed income by itself otherwise disqualifies you to claim a deduction or credit (e.g., putting you over the limit to deduct student loan interest). But it's a miserable situation, fixable only if she qualifies as a dependent or if you marry her.

However, the numbers you're reporting seem a little off to me. If the imputed income is really $344 per period and they are withholding $200, that's 58%. 58%! I'm in a different tax bracket from you, and I have a mandatory pension withholding, and I get withheld at about 48%. You should talk to HR to make sure it's being done right. There are stories of screwups before. Perhaps you can mitigate the damage for the time before you can elect to drop her from your coverage.
posted by praemunire at 11:28 AM on January 13, 2017 [2 favorites]

Oh, I see, you included the increase in premium in your net pay drop. That brings it down to 39.5%, which seems more likely to be right. Sorry.
posted by praemunire at 11:31 AM on January 13, 2017 [1 favorite]

Sorry, one more point: at least for this year, before deciding that you can't afford this coverage, you should take a hard look at your ACA options. If she has no coverage, she will have to pay a tax penalty. Her ACA coverage may or may not cost her more than what you are paying now (with no income, she will probably be eligible for a subsidy). You need to pencil all that out before deciding whether it will actually benefit your short-term household income to drop her in the next enrollment period.
posted by praemunire at 11:35 AM on January 13, 2017 [1 favorite]

praemunire has it - your workplace pays for part of your insurance and that doesn't count as "income" for you, but when it pays for part of your partner's, that counts as imputed income. Your withholding has adjusted accordingly, and your tax bill shouldn't be grossly different one way or another. (Unless, I suppose, perhaps you're right on the line for a different tax bracket and this difference forces you over that line - I haven't been in that situation.) This was probably in the really fine print somewhere in your benefits package, but it's easy to overlook.

If this is not feasible for you, you need to engineer a life change so you can change your insurance options. You'd have to look at your own plan to see what qualifies, but typically it's something like either marriage, terminating your domestic partnership, or your partner getting coverage elsewhere.

I'd probably start by looking at the termination option. At my workplace, this involves filing a form stating the partnership is dissolved. You need to provide a separate address for your partner, all domestic partnership benefits (not just insurance) are terminated, and also you cannot register a new domestic partner for 12 months. You'd have to look at what the requirements and implications are at your workplace to see if that's an option for you.

Otherwise, you might be looking at either marriage, or finding other coverage. Any of these options are likely to change your financial situation, so you should probably look really carefully at the fine print for all of them before making up your mind.

(My sympathy. This whole tax situation is a pain in the ass, and someday my partner and I will probably decide that our desire to be unmarried is outweighed by the extra damn money we're paying that we could be spending on books or vacations instead, and we'll just get married already and not tell anyone except HR.)
posted by Stacey at 11:43 AM on January 13, 2017 [1 favorite]

Using your numbers, the employer insurance portion is $344 and the employee portion is $64 for a total of $408 bi-weekly. That's a total of $10,600 per year for adding a single person. That seems awfully high. The average employer insurance plan in New York is $6800 per year as you can see from this table, although from 2015.

Is your insurance a gold-plated plan with zero deductible and zero co-pay? Because that seems the only plausible reason for a plan costing that much. If not, you might check with human resources to find out the exact total cost of the plan because it seems inordinately high. Also you might also find out if there is an option to have a lower premium if you accept a higher deductible.

Another way to find out the true cost of your health insurance is to look at last year's W-2, Box 12, Code DD. That shows the total employer plus employee cost of your insurance plan. Note that some small employers are not required to put Code DD on your W-2.
posted by JackFlash at 12:08 PM on January 13, 2017 [1 favorite]

Been there, done that.

your tax bill shouldn't be grossly different one way or another

The difference will probably appear on your state taxes more than your Federal taxes, since your domestic partnership is recognized by the state but not the Feds. On my W-2, my California income was thousands of dollars higher than my Federal income (and thousands of dollars higher than my actual salary), with those thousands of dollars being the portion of my (ex!) partner's insurance premiums that my employer paid. It put me in a different state tax bracket, and instead of getting a state refund I actually owed money.

Imputed income is not a good thing for the generous domestic partner. It ends up biting you in the end. Do know, though, that you can always work out a payment plan for taxes you owe but can't afford to pay right now.
posted by mudpuppie at 12:34 PM on January 13, 2017 [3 favorites]

In addition to the $64 premium for my domestic partner's coverage, it looks like they're adding $344 imputed income, which is then being taxed.

One thing to consider (if JackFlash is correct, and $344/month for an employer plan is high in NYS) is whether that $344 is going to be imputed monthly or bi-weekly. If it's monthly, your next bi-weekly paycheck might look far more reasonable. Your HR folks should be able to answer this question for you.

Another thing you might want to do is run a "simulated" 2017 tax return (assume 2016 tax law applies, your jobs/wages will stay about the same as last year, and add the true total imputed income for the year. You might find that for [reasons] your 2017 return will be inflated. If that's the case, you might want to adjust your withholdings by filing a new W-4 (which you can do at any time, I believe). The risk there, of course, is that you will not be paying enough tax bi-weekly, and end up owing money to the government next year. If that amount of money is [reasonable]*, you won't owe interests/penalties if you pay by tax day 2018. But you want to be careful to not dig yourself too deep of a hole.

*the magic number (or the means to calculate it) is written on the tax forms, I'm pretty sure.
posted by sparklemotion at 12:55 PM on January 13, 2017

The insurance number does not seem super high to me. Here are the 2017 rates for New York state employees, for instance (you have to ignore Empire Plan, which is an internal plan). NYS is a large employer with market power against the insurers, but most of the HMOs, especially in the NYC area (where OP is), run about $100/period/person or more. OP's employer is asking him to pay about 16% of the total premium, which is not implausible.
posted by praemunire at 1:00 PM on January 13, 2017

On my W-2, my California income was thousands of dollars higher than my Federal income

Don't you have that backwards? California recognizes a domestic partner the same as a married spouse which means that all health insurance benefits for the partner would be excluded from income by the state.
posted by JackFlash at 1:06 PM on January 13, 2017

Don't you have that backwards?

Always possible -- it's been a couple of years. All I know is that it didn't benefit me, at all, and I wish I hadn't put my DP on my health insurance.
posted by mudpuppie at 1:34 PM on January 13, 2017 [1 favorite]

All I know is that it didn't benefit me, at all, and I wish I hadn't put my DP on my health insurance.

That depends. In the OP's case, it seems they are getting a $10,800 insurance policy for less than $5000 which is better than a poke in the eye, but maybe they don't really want a high-end $10,800 plan, in which case it is no bargain.

The employer might offer lower cost plans as an option, but you may not be able to change until next year. It never hurts to ask. An insurance provider is more likely to allow you to change to a lower benefit plan than to a higher benefit plan mid-year.
posted by JackFlash at 2:02 PM on January 13, 2017 [1 favorite]

JackFlash, I think you have it right. I'm admittedly pretty confused about all this, but I think it's just a great plan that is very costly as a result (I work for a high-profile medical research school, and it offer this fantastic health plan, which is more than we need). Paying $5000 for a $10,000 plan, when we don't need a $10,000 plan. I think I may be on the hook for a year, but we're looking at options. Dissolving the domestic partnership seems like the best and most depressing solution.
posted by scarylarry at 2:28 PM on January 13, 2017

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