Minnesota expects to pay the Internal Revenue Service about $6.8 million — with the final total still subject to IRS calculation — after discovering it mishandled tax rules for health and dental benefits for former spouses of state employees.
Minnesota Management and Budget sent a letter to lawmakers on June 18 requesting the approval of an initial $2.47 million of an estimated $6.8 million in total owed to the IRS. In that letter, MMB said it found an error in February of 2025 with how the state provided insurance coverage for ex-spouses of state employees under the State Employee Group Insurance Program medical and dental insurance plans.
“The total amount due to the IRS will be approximately $6.8 million, subject to final calculation by the IRS,” the letter reads. “MMB intends to draw on a variety of sources to make this payment, including: the MMB general fund appropriation, contributions from other state agencies based on the number of ex-spouses historically covered, and the available balance within the SEGIP administrative fund.”
MMB said in the letter that the state had been following past guidance from state insurance regulators, which required continuation of coverage if, at the time of a divorce, the ex-spouse and one or more children in common were covered.
“These benefits were provided on a pre-tax basis,” the letter says. “MMB determined that those benefits should have been provided on a post-tax basis to comply with federal tax requirements.”
The state is still working on an agreement with the IRS that requires the state to pay the amount equivalent to what the state should have withheld and sent to the IRS for Medicare and Social Security tax contributions and income tax for the last three tax years, according to the letter from MMB.
A separate letter from MMB obtained by Forum News Service to state employees on July 23 says affected employees would be subject to an extra tax in 2025. An example calculation within that letter estimated an extra tax of roughly $583 for those who covered one former spouse on their insurance.
MMB declined to comment on the matter at this time, as negotiations with the IRS are ongoing.
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