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Many employers provide their employees’ domestic partners health insurance coverage.

In addition to the standard medical and dental insurance, domestic partner benefits can also cover life and disability insurance, relocation and travel expenses, education and tuition assistance, family and bereavement leave, and inclusion of partner participation in company activities. Because same-sex marriage is now legal in every state, some employers have discontinued their domestic partner benefits and require that couples be married to be eligible for employee benefits. However, some employers—particularly those that offer benefits to both same- and opposite-sex domestic partners—are still offering domestic partner benefits.

In this post, we’ll cover some things to consider when it comes to offering insurance coverage to your employees’ domestic partners.

Definition of a Domestic Partner

The phrase “domestic partner” is not defined by federal, state, or municipal legislation. Certain employers opt to create their own definitions, however others reference domestic partner registration systems governed by state or local legislation. Commonly used plan requirements stipulate that domestic partners:

  • Have lived together for a specified period (generally at least six months)
  • Share financial responsibilities
  • Are not blood relatives
  • Are at least 18 years of age
  • Are mentally competent
  • Intend that the domestic partnership be of unlimited duration
  • Register as domestic partners if there is a local domestic partner registry
  • Are not legally married to anyone or engaged in another domestic partnership; and
  • Agree to inform the company if the domestic partnership terminates

Some plans demand that employees submit a “termination of domestic partnership” form if the relationship ends, and submit affidavits affirming domestic partner status to plan administrators.

Employers should specify what benefits are available to domestic partners, and if domestic partners’ dependents will be eligible under the plan. In addition, domestic partner eligibility requirements and the extent of benefits must be clearly stated in summary plan descriptions (SPDs).

 

Reasons for Offering Domestic Partner Benefits

Some of the most common reasons for providing domestic partner benefits include:
    • Hiring and retention
    • Improved employee productivity
    • Ethical concern for others
    • State law requirements

Reasons for NOT Offering Domestic Partner Benefits

Some of the most common reasons for companies electing to not provide domestic partner benefits includes:
    • Availability of same-sex marriage
    • Fraud concern
    • Adverse selection (employees entering a domestic partnership just to obtain health benefits)
    • Tax issues

Tax Implications

Generally, domestic partnership couples are not eligible for federal benefits that are granted to married couples. For example, a domestic partner is not a legal spouse for federal tax purposes. An employer is obligated to report and withhold taxes on the fair market value (FMV) of a domestic partner’s health coverage to the extent the coverage is paid for by the employer. This is not true for health insurance coverage for legal spouses (including same-sex spouses).

The exact rule on what constitutes FMV is unclear. The FMV of coverage is calculated based on the amount a person would have to pay for the specific coverage in an “arm’s-length” transaction. FMV is often determined by subtracting the employee-plus-one coverage cost from the employee cost or by using the plan’s applicable COBRA premium for the coverage, minus the 2% surcharge. In order to calculate the taxable amount, the employee’s post-tax payment for the coverage must also be deducted from the FMV.

Some employers “gross up” their employees’ salaries in order to cover the additional taxes derived from the income imputed by domestic partner benefits. Employers should disclose the process by which employee income is imputed to employees. This would enable impacted employees to make informed decisions about the price of coverage and the tax consequences of providing their domestic partners with health coverage via their employers.

Domestic partner benefits may only be exempt from taxation if the domestic partner qualifies as a a “dependent” under Internal Revenue Code (IRC) Section 152, which defines a “qualifying relative.” The domestic partner must be a member of the employee’s or taxpayer’s household and have the same primary address as the employee or taxpayer for the entire year in order to be eligible as a dependent. Furthermore, the employee/taxpayer must provide the domestic partner with more than half of their annual support. Plans typically require the employee to attest to the following:

  • that the domestic partner is the employee’s tax dependent as of the date the annual enrollment form is completed; and
  • that the employee anticipates the domestic partner will remain the employee’s tax dependent for the following year.

If an employee’s domestic partner qualifies as a tax dependent, the value of the health coverage and benefits paid under the health plan are tax-free to the employee and domestic partner. To be eligible for tax-free health coverage, a domestic partner does not need to be listed as a “dependent” on the employee’s federal tax return. Furthermore, since the child is typically the qualifying child of another taxpayer, such as the domestic partner or the child’s other parent, the child of a domestic partner is unlikely to be the employee’s dependent.

Employee Benefit Laws

Some states have laws that to address domestic partner benefits, ie: requiring that any employer that provides health insurance benefits to employees’ spouses must also offer the same benefits to domestic partners of employees or laws that allow employees to take job-protected leave to care for their domestic partners. Employers should stay updated of any state rules that may affect benefits for domestic partners.

The Employee Retirement Income Security Act of 1974 (ERISA) and the IRC are federal laws that directly apply to domestic partner benefits. ERISA governs private sector, employer-sponsored welfare and retirement plans. ERISA generally preempts state laws that relate to employee benefit plans but not state laws that regulate insurance. The following discusses federal employee benefit provisions as they relate to domestic partner benefits.

Flexible Spending Accounts (FSA)

Pretax contributions made to an FSA can be used to offset medical costs that are not reimbursed by health insurance. Even if the employer provides health insurance benefits for the domestic partner, an FSA cannot be used to pay for the domestic partner’s medical expenses unless the domestic partner meets the IRS definition of a tax dependent.

Health Savings Accounts (HSA)

Medical expenses incurred by, or on behalf of, a domestic partner are ineligible for tax-free reimbursement from an HSA unless the domestic partner qualifies as a tax dependent.

Group-term Life Insurance

An employee’s group term life insurance is excludable from income up to a certain limit. This exclusion does not apply to group-term life insurance for a spouse, other family member or any other person, including domestic partners. In particular, domestic partners are not eligible for tax-advantaged group-term life insurance through an employer’s group insurance plan. However, domestic partners can be named as a beneficiary of life insurance purchased by an employee (his or her domestic partner) or by an employer for the employee to the same extent as legal spouse.

HIPAA

Employees who acquire new dependents or whose dependents lose coverage are entitled to special enrollment rights under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The eligibility requirements of the specific health plan determine how much domestic partners are eligible for special enrollment. However, the acquisition of a domestic partner by an employee does not trigger HIPAA special enrollment rights.

COBRA

Group health plans are required by the Consolidated Omnibus Budget Reconciliation Act of 1995 (COBRA) to continue coverage in the event that an employee, the employee’s spouse, or a dependent child loses coverage under the terms of the plan due to certain events. These events may include termination of employment, divorce, or a dependent no longer qualifying as a dependent under the plan terms. Domestic partners cannot qualify as “spouses” for COBRA purposes and do not have their own COBRA election rights.

An employer may choose to extend comparable benefits to their domestic partner with the approval of the insurance carrier or HMO. If the former employee elects and pays for COBRA coverage, he or she can add the domestic partner to the plan during an open enrollment period. The domestic partner’s plan coverage will end when the former employee’s COBRA coverage ends. If the domestic partner’s children are covered as dependents under the plan, they will be qualified beneficiaries in connection with any COBRA qualifying event.

FMLA

The Family and Medical Leave Act of 1993 (FMLA) provides yearly leave for specific family or medical needs. A domestic partner is not considered a spouse for FMLA leave purposes, even if the partner qualifies as a tax dependent. An employer is not legally required to extend family and medical leave to an employee to care for a domestic partner.

Conclusion

Employers need to understand the complex employment, tax, and benefit issues that come with benefits for domestic partners. An employer should determine the status of the domestic partner rules in each state in which it operates and understand the needs and values of their workforce when deciding whether to offer domestic partner benefits.

Call DMJ for a complimentary Benefit Plan Review and find out how he can better help you meet your requirements.

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