With most Massachusetts health insurance plans, provided he/she has not yet remarried, an employee with at least one dependent child can add a former spouse to the coverage for no additional cost, so there is no additional cost to the employer either. In these situations, one would presume that no income should be imputed to the employee because the employer is not required to pay the insurer any additional premium for the benefit of continuing coverage of a former spouse. Unfortunately, not all human resource departments share this view. Some human resource departments are deciding that the former spouse is receiving a benefit that is equal to the value of the employee’s own individual coverage and, thus, are imputing the fair market value of that coverage to the employee on his/her Form W-2.
Other human resource departments are imputing the income to the employee by dividing the entire employer benefit amongst the family members in order to determine the fair market value of the benefit to the former spouse. For example, if a family plan costs the employer $100 per week and the former spouse is one of four people covered, some human resource departments would impute income of $25 per week ($100/4) to the employee as the fair market value of health care coverage of the former spouse. In neither scenario does the “fair market value” bear any relation to any real cost incurred by the employer.
Because of the discretionary nature of the imputation, many employees find themselves having to argue and plead their cases on an individual basis to human resource personnel or employers to not impute income to them (with varying degrees of success). Worse still, some employees do not even realize that income is being imputed to him/her until the following year when he/she sees it on his/her Form W-2.
Until federal tax laws set clearer guidelines as to how to apply the fair market value of the continued health insurance coverage of a former spouse, divorcing spouses should be mindful of this issue when providing for continuing health care coverage of a former spouse. Divorcing spouses and their counsel should include specific language in divorce agreements to plan for the possibility of imputed income after consultation with a tax professional, including a determination of who will have the burden of the economic and tax cost of continuing insurance coverage. Failure to take this issue into consideration at the outset could result in unexpected consequences to both divorcing spouses.