Imputed Income and Health Insurance in Divorce Settlements

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Divorcing spouses have many issues to consider in negotiating the terms of a divorce agreement. One of the seemingly “easier” issues for divorcing spouses and their counsel is health insurance. While the issue of health insurance coverage is typically included within the divorce agreement, the federal tax implications are often overlooked. Recent interpretations of federal tax law underscore the need for divorcing spouses to use skilled divorce counsel and tax practitioners in negotiating the terms of their divorce agreements.

It is commonplace for a divorce agreement to contemplate one spouse continuing to provide health care coverage through his/her employment for an ex-spouse. Under the Affordable Care Act (ACA or “Obamacare”), the IRS will require reporting by the employer of the cost of such coverage of employer-sponsored insurance. In some instances, 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 continuedto 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. Therefore, 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. Below is a brief discussion of how imputed income works in connection with continuing health care coverage of a former spouse.

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