Couples who are working through their divorce papers will have to face several issues when negotiating a final agreement. In the past, one of the “lighter” loads of this process has been that of health insurance adjustments. These are typically spelled out in the final decree, but what isn’t always that easy to decipher is the final tax liability.
It’s not unusual for a divorce agreement to weigh the matter of an ex continuing spousal coverage through a policy provided by their place of employment as divorce forms are finalized. But under the new terms of the Affordable Care Act (ACA, aka “Obamacare”), the Internal Revenue Service (IRS) will require reporting by the employer of the cost of such coverage.
The Reporting Requirement
“In some instances,” explains Massachusetts family law attorney Ron Barriere, “the reporting requirement may facilitate the apportionment of the cost of health coverage for divorced spouses. However, the insuring spouse must be forewarned of the possibility of being subject to tax on imputed income based on the fair market value of the insurance benefits being provided to his/her ex-spouse.”
“The likelihood of this imputation varies greatly from employer to employer, such that divorce counsel often cannot state with certainty whether or not an employee who continues to carry the health care coverage of his/her former spouse will in fact be subject to tax on imputed income,” Barriere said, adding that “it is extremely important to be cognizant of this issue and plan for the possibility of imputed income for continuing health care coverage of a former spouse.”
What Is Imputed Income?
Barriere acknowledges that under the Internal Revenue Code (IRC), “employer-provided health insurance is typically considered a nontaxable fringe benefit to the employee.” However, he adds, “this exclusion only applies to coverage of the employee and the employee’s spouse, dependents, and children up to a certain age. It does not apply to the employee’s former spouse.”
“The IRS views the health care coverage of a former spouse as a taxable fringe benefit to the employee, notwithstanding the fact that the former spouse may in fact be the one who pays for any additional coverage costs,” Barriere said. “The IRS has taken the position that the ‘fair market value’ of health insurance benefits provided to a person who is not an employee’s spouse or dependent must be ‘imputed’ to the employee and included in his/her federal gross income.”
Here are Barriere’s full thoughts on the matter. As an attorney well-versed in this avenue of family law, you have decided (or will decide) to file for divorce in the next year.