Tax Issues Affecting Minnesota State Employees
St. Paul – Minnesota is anticipating a final cost of approximately $6.8 million related to tax discrepancies discovered regarding the health and dental benefits provided to former spouses of state employees. This amount still needs to be confirmed through IRS calculations.
In a letter sent to lawmakers on June 18, state management outlined the need for IRS approval for this estimated total, which breaks down to around $2.47 million. The Minnesota Management and Budget (MMB) took note of certain inaccuracies in how health and dental benefits were allocated to these ex-spouses, under the state employee group insurance program.
The letter stated, “The total amount under the IRS will be around $6.8 million, subject to final IRS calculations.” To cover these payments, MMB indicated that it would utilize the General Fund budget, along with contributions from other state agencies in accordance with historical coverage numbers, and also available funds in the SEGIP Management Fund.
MMB noted that the state had adhered to prior guidance from insurance regulators, which necessitates continued compensation if the ex-spouse and any children are shared at the time of divorce.
“These benefits were initially offered on a pre-tax basis,” the communication explained. “MMB has concluded they should instead be provided on an after-tax basis to align with federal tax requirements.”
The MMB further elaborated that discussions are ongoing to establish an agreement ensuring the state pays an amount equal to what was previously withheld, alongside remitting comparable amounts for Medicare, Social Security tax contributions, and income taxes.
A letter issued to state employees on July 23 revealed that those impacted could expect to incur additional taxes in 2025. For instance, it mentioned a potential extra tax of about $583 for an individual covering one spouse with insurance.
As of now, MMB has not provided further commentary on the matter, given that negotiations with the IRS are still in progress.
