Is my employer over-charging me for imputed income?

[Lgrey8]

Hello,

I recently added my non-dependent partner as my domestic partner on my health insurace.  My benefits representative said I'll have a deduction of  $273.60 per pay period which is my imputed income.  As I understand it, imputed income is the value of the benefits to my DP that I'm responsible for paying the taxes on. So if my imputed income was $273 per pay period, wouldn't I only owe the tax on that?  I looked up how much my employer is contributing to my insurance premium for my DP and it's about $250.  So how am I being deducted far more than the entire employer contribution?  Am I missing something? It seems like something must be incorrect here. Any help much appreciated!

[Opus 17]

First, it is important to understand that everything of value that is provided to you by your employer in return for your services is considered taxable income to you, unless it falls under one of the protected categories of fringe benefits.

Health insurance benefits for yourself, your spouse, and your dependents are in the protected category of non-taxable benefits.  Your share of the premium is deducted from your paycheck on a pre-tax basis, and your employer is allowed to pay part of your premium without considering it part of your taxable income.  

For a non-dependent DP covered by your insurance, if your employer requires you to pay part of the premium, that is deducted from your paycheck after tax, not before tax.  And if your employer pays part of the premium for you, that must be added to your wages. It would be included in box 1 of your W-2 at the end of the year and is subject to income tax, Social Security tax and Medicare tax withholding, as if you had received the same amount as a raise.

It sounds as though the total cost of your partner’s insurance coverage is $523 per month. The $250 paid by your employer is the imputed income, and the $273 that you will be paying is your after-tax share of the premium.

[Lgrey8]

Thanks for your response.  That makes sense that I am being taxed on the value given to me - in this case my DPs health coverage.  Before I added her I was paying a $25 a month premium.  With her added the premium increases to $45.  I'm not sure what the exact tax on it would be in California, but if it was something like %40, and the value of her coverage was $523 per month, wouldn't I only owe the tax on that $523?  If %40 that would be about $210 per month which would mean $105 taken out of my bi-monthly payhcecks.  I don't understand how I'm getting a $274 deduction per paycheck twice a month.  If the imputed income is the value that I am receiving in the form of benefits, then why am I paying for all of it?  It seems like that defeats the purpose of employee healthcare.  I was trying to help my domestic partner and now I'm being deducted way more than she would pay for insurance out of pocket?  That just doesn't make sense to me.  Is there something key that I'm missing?  Thanks again for your explanation.  I'm trying to wrap my head around this and just feels like it can't be right.

[Opus 17]

So I’m not clear what you mean by “deduction” from your paycheck.  You might be talking about a line item pre-tax deduction, a line item after-tax deduction, or a reduction in your take home pay from extra tax withholding, or a combination of all those things.  

You say that your share of the premium increased by $20 per paycheck, that you think the employer share of the premium is $250 (but you don’t say if that is per paycheck or per month), and you say that you have a “deduction” of $273 per paycheck, but you don’t say how often you are paid.  Can you clarify?

I’m trying to think about how to help you analyze your situation further while asking for the minimum necessary information. Remember that this is a public forum, so don’t post any identifying information like name or an address, and don’t post any information that you would not be comfortable with being public.  

let’s try this: what is your gross annual salary, the amount of Social Security withholdings from your last paycheck before adding your partner and your most recent paycheck, and how often are you paid?

Or, perform the following calculations on your last paycheck before you added your partner and your most recent paycheck. Take the amount of Social Security tax and divide by 6.2%. that will get you the amount of earned income that you are being taxed on for that paycheck.  (However, this calculation only works if your gross annual salary is less than $132,000. If you salary is higher there is a different calculation we can use.)  For example, if your Social Security tax is $286, then your earned income on that check would be $4612.

Your Social Security tax should have gone up with the addition of your partner on your insurance. That translates into extra earned income, which is the imputed income that you are being taxed on, and which should be the value of the employer-paid part of the premium, if the employer is calculating it correctly.  What is that figure?

(Your state and federal income tax withholding should also have gone up, but using the Social Security tax is the easiest way to figure out what the amount of imputed income actually is.)

[Critter-3]

OR .... you could just ask your employer to explain the details to you so you understand what is being added and how this affects your tax withholdings. 

[Lgrey8]

Thanks for working through this with me Opus.  I am trying to get info from the benefits department as well but they are giving me very short answers and basically told me to "ask a tax specialist" for help understanding it.

To me it seems like they are deducting the entire amount of the imputed income they calculated.  After I added my DP a few days ago they wrote me this:

"In addition, with your Domestic Partnership, we will also need to deduct the imputed income to make up for the previous payrolls and all will be taken on your 10/10 payroll in the amount of $1,094.40. Following the 10/10 payroll, your imputed income will be $273.60, per pay period."

Since I get paid twice per month, it sounds like they calculated my imputed income to be $273.6 and simply multiplied that by 4 and are deducting that from my next paycheck.  Going forward the $273.6 calculated imputed income will continued to be deducted from my paycheck.  But from what you said and what I've researched, that's not how imputed income works is it?  It shouldn't just be taken out of my paycheck right? Imputed income is taxable I understand, but the entire imputed income isn't something that should get taken out of my paychecks is it?

I looked at a pay stub online that shows that the employer contribution for both of our healthcare is $505.38 twice a month or $1,010.76 monthly.  If half of that (the amount they're paying for my DP) is imputed income, then that gets us close to the $547.2 monthly imputed income.  The extra amount I believe comes from the dental coverage provided.

My employment is contract-based, but the monthly salary is $4506.68.  I don't see anything on my last pay stub that says social security specifically, but FICA Medicare withholding was $32.68 and Fica OASDI was $139.71.  Is that what you were asking for?

I haven't received a paycheck since the message above they sent me that I quoted, and I guess I wouldn't be able to do those calculations since they are going to be making all of those deductions. But maybe it will work once I see those FICA Medicare and Fica OASDI values?

From this information would you agree that they are improperly deducting the calculated imputed income from my paycheck?  Please let me know if there's any other info I can provide or if you agree that they shouldn't be deducting the entire amount of the calculated imputed income from my checks!  Much appreciated all of your help 🙂

[Lgrey8]

I am trying that as well but they are giving me very short answers.  Here's the one that inspired me to ask on here.  They told me:

"In follow up to your questions on the imputed income for your Domestic Partnership, we suggest speaking with your tax advisor for more information on how the Domestic Partner enrollment would apply to your taxes.  

Please let me know if you need anything else."

Following up I asked said I found my pay stub that said that they are paying $505.38 medical and $37.32 for dental per pay period for me and my domestic partner.  Since I am paid twice a month that means they are paying $1,085.4 monthly, but since half of that value is going towards my coverage, the imputed income should be $542.7.  That's the value that I should be paying taxes on monthly right?  Instead they are taking the entire value of the imputed income from my paycheck.  It's like we're paying out of pocket for my partner's coverage.  That can't be right can it?  How could it be "income" if I am paying it? That's not income that's an expense!

[Opus 17 · Accepted solution]

It sounds like you need to wait for your 10/10 paycheck to be issued.

Firstly, if the employer's share of the combined premium is $542.70 pp but the imputed amount is $273.60, then it sounds like your solo coverage costs them $269.10.  There's no reason the costs have to be exactly equal.  Maybe the insurers charge an extra $9 per month to administer DP benefits?  It's not really important.

The situation with the retroactive premiums is common. Typically, the employer would use September deductions to pay for October premiums (to be at the insurer before October 1).  If your DP coverage starts 10/1, then there would be at least two back premiums the company has to pay on your behalf, and maybe 3, depending on how the cycles run.  I would expect that on your 10/10 check, your employer will have to pay to the insurer, $542.70 for half the November premium, plus $273.60 x 2 for the October premiums for your DP.  Maybe you started coverage on September 1 and the employer is just getting around to adjusting your payroll, so the employer also has to retroactively pay $542.70 for the September premiums.  

Assuming that your 10/10 check will have to account for your current total coverage of $542.70 (of which $273.60 is imputed income) plus $1094.40 of retroactive payments to the insurer, then what you should see is not a deduction of $1094.40, but you should see increased tax withholding based on that amount.  It's not clear to me if the employer rep is saying you will pay $1094, or you will pay the tax on $1094, and I think you just have to wait.  Maybe the rep was simply not precise in their language. 

If you pay the entire $1094, then they are not imputing the income to you, they are simply charging you the full cost of the insurance.  Maybe they have a policy that says they do this when DP coverage starts?  You may need to ask.  DP benefits are not regulated by any federal law, although they might be regulated by laws in your state, and maybe it's just their policy to bill you for the full premiums when you first enroll.  I think you just need to wait for your 10/10 check to see how you are taxed.

For future checks, you should see your take-home pay go down by the amount of tax that will be withheld on the $273.60 of imputed benefits.  That should be 6.2% OASDI, 1.45% Medicare, and maybe 22% for federal and 5-10% for state taxes depending on your state.   The regular paycheck after all the retroactive adjustments have settled down will be much more predictable and easy to explain. 

[Lgrey8]

Thank you Opus!  That was the clarification that I was hoping for.  From what they've told me, it sounds like they're charging me the whole amount of the imputed income as well as the premium.  Future paychecks would tell us if they're also withholding the tax on the imputed income as well.  I'm fine with paying those taxes but deducing the imputed income doesn't make sense.  I've contacted them again and even found the section of the employee benefits handout that states that tax on imputed income is owed in addition to the premium.  Imputed income shouldn't be deducted though because as you said, in that case they are not imputing the income but simply charging you the full cost of the insurance!

I am waiting for a response from them now and I hope that explanation gets through to them and for a fair resolution.  I'm not sure what I'll do if they continue to insist on deducting the value of the imputed income.  Will need to speak to a tax attorney then I suppose.  Thanks again for taking the time to go through it with me.