Falling Through The Gap

Khaki conglomerate The Gap Inc. has offered domestic-partner benefits for its employees since last January, but with decidedly mixed results. The new policy was lauded as a progressive move, as the San Francisco-based company joined other locals like Levi Strauss & Co. and Apple Computer Inc. in recognizing nontraditional living arrangements.

"Many of our employees in San Francisco and at our big design offices in New York have domestic partners," says Gap spokeswoman Beverly Butler. "We respect our employees' lifestyle choices, and we wanted to prove it."

But hardly any Gap staff members -- fewer than 1 percent of the company's 60,000 worldwide, in fact -- have taken advantage of the new provisions, which extend health insurance and other benefits to domestic partners.

The reason is simple: Domestic-partner benefits are considered taxable income. Under federal and state tax laws, employers can deduct health insurance premiums paid for employees and their dependents. But they can't do so for premiums paid for registered domestic partners, because federal and state laws don't recognize domestic partners as legal dependents. To avoid paying taxes on what they spend on domestic-partner benefits, employers call them "additional income" paid to employees. That, in turn, raises the employee's tax bill.

"Somebody's got to be taxed on it [the amount paid for insurance premiums]," explains benefits consultant Tom Sher. "Employers can't deduct it, so they pass it on to their employees." So much for fairness in the workplace.

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