Walking Employees Through the Regulatory Maze Surrounding Same-Sex Domestic Partner Benefits By Todd A. Solomon and Brett R.

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1 Walking Employees Through the Regulatory Maze Surrounding Same-Sex Domestic Partner Benefits By Todd A. Solomon and Brett R. Johnson Todd A. Solomon is a partner in the Employee Benefits Practice Group of McDermott Will & Emery s Chicago office. He is the author of the third through seventh editions of Domestic Partner Benefits: An Employer s Guide, and was the co-author of the book s first and second editions. Brett R. Johnson is a partner in the Employee Benefits Practice Group of McDermott Will & Emery s Chicago office. Private employer provided domestic partner benefits are offered almost entirely on a voluntary basis. Once provided, however, a vast array of federal, state, and local regulations can have an effect on the benefits that are offered. Much of the complexity of this regulatory structure is because of the fact that federal law defines marriage as between only a man and a woman, while states are free to determine their own approaches to the legalization of same sex relationships. This article aims to provide a broad overview of the legal and practical considerations that guide same sex domestic partner benefits. It is meant as an aid to practitioners looking to counsel an employee or an employee s domestic partner on domestic partner benefit issues. Please note that, while certain states recognize nonmarried, opposite sex relationships for the purposes of providing domestic partner benefits, employers often opt to limit domestic partner benefits to employees in same sex relationships because employees in opposite sex relationships have access to spousal benefits (in all 50 states) if they marry. Therefore, when this article speaks of domestic partners, it is talking about same sex domestic partners, unless otherwise specified. Similarly, when this article discuses employers, it is referring to private sector (that is, nongovernmental) employers, unless otherwise specified. What Benefits Are We Talking About? In addition to salaries and wages, most employers in the United States provide some form of employee benefit package. Employee benefits are not generally required by law, and employer offerings run the gamut from nothing to executive packages that include time on corporate jets and country club memberships. Similarly, when benefits are offered, an employer can choose to pay all, part, or none of the benefit costs. Just as employers have latitude to choose the employee benefits they provide and how much they pay, they also have a great deal of discretion over which domestic partner benefits they provide. For most rank and file employees, employee benefits typically include health coverage, retirement benefits, and paid time off policies, and these are the focus of this article. The Federal Law View of Domestic Partners The first thing to understand about federal law and domestic partner benefits is that no federal law bans discrimination on the basis of sexual orientation. The second thing to understand is that the Defense of Marriage Act (DOMA), Pub. L. No , 110 Stat (codified at 1 U.S.C. 7 and 28 U.S.C. 1738C), controls all federal laws, rulings, regulations, or interpretations that touch on marriage in any way. Before DOMA, the federal government deferred to state law determinations of marital status. When DOMA was signed into law in 1996, it did two things: first, it established that marriage, for federal law purposes, means only the legal union of a man and a woman; and, second, it authorized states to refuse to give effect to any other state s same sex policies. There is a wide array of domestic partner regulations in the states, all of which are broadly trumped by DOMA for federal law oversight of areas such as employee benefits, immigration, and taxation. Same sex couples, even if in a relationship that is provided with legal rights under state law, do not have any more rights than a single individual has under federal law. This means, among other things, that no spousal benefits are available to same sex married couples under Social Security, Veterans Affairs, or any other federal program. Domestic Partners Are Created by State Law State law recognition of domestic partners is most often seen in three types of legally recognized relationships: (1) same sex marriage (Connecticut, Iowa, Massachusetts, New Hampshire, New York, Vermont, and Washington, D.C.), (2) civil unions (New Jersey, Illinois, Delaware, and Hawaii), and (3) domestic partnerships (California, Nevada, Oregon, Washington, and the District of Columbia recognize domestic partnerships as having the same rights as opposite sex spouses, while Colorado, Hawaii, Maine, Maryland, and Wisconsin recognize limited forms of domestic partnerships). Civil unions and domestic partnerships are not necessarily 1

2 limited to same sex couples. Civil unions in Hawaii and Illinois and domestic partnerships in California, the District of Columbia, Nevada, New Jersey, and Washington are open to opposite sex couples. Also, some states have gone through changes that may provide for a grandfathering of benefits (for example, California continues to recognize same sex marriages that were performed between June 16 and November 4, 2008; New Jersey continues to recognize domestic partnerships even after it began providing for civil unions; and Vermont continues to recognize civil unions entered into before September 1, 2009, when it began to recognize same sex marriage). In addition to the state specific legal requirements that attach to the specific forms of domestic partnerships mentioned above, employers also can set forth specific criteria for domestic partners to ensure that benefits are extended only to those domestic partners who are the equivalent of legal opposite sex spouses. Employees and their domestic partners may be required to sign affidavits of domestic partnership as proof that the domestic partner is the equivalent of the employee s spouse and that their domestic partnership satisfies the criteria required by the employer. Employees worried about confidentiality should remind employers to ensure that domestic partnership affidavits are kept confidential in the same manner as the confidentiality of medical records is required to be maintained by the Health Insurance Portability and Accountability Act (HIPAA), particularly in light of the varied public opinion concerning gay and lesbian issues and the potential effect that identification may have. Although employers are able to determine their own criteria for a domestic partnership relative to eligibility for employer sponsored benefits, many employers look for similar common factors. An employer can require an employee to attest that he or she has been in a relationship with his or her domestic partner for at least some period of time (six months or a year is common) and that the employee and his or her partner have shared a common residence for that time. An employer will likely require some proof of financial interdependence. In cities or states with formalized domestic partner registries, an employer also may require proof that the employee and his or her domestic partner have formally registered their relationship with the locality. Nearly all employers require the employee and his or her domestic partner to be competent to attest to the relationship, to be unrelated to the same degree as required for marriage under state law, and to meet the minimum age required for marriage under state law. Note that, if an employer is located in a city or state with an equal benefit ordinance (see below), it must adhere to any prohibitions against requiring any more proof of a domestic partnership than that required for spousal relationships. Required/Prohibited Benefits Under Federal, State, and Local Regimes A number of federal laws affect employee benefits generally and therefore have an effect on domestic partner benefits. Three of the more important federal regimes are mentioned here. First and foremost is the Employee Retirement Income Security Act of 1974 (ERISA). ERISA governs pension plans such as 401(k) plans and welfare benefit plans such as medical and hospitalization benefits. ERISA does not require that such benefits be provided; instead, it regulates such plans if they are put into effect. ERISA is intended to protect the interests of participants and provides for standards that must be met for a plan to qualify for favorable tax treatment for the employer and the employee. Two other federal provisions, the Family Medical Leave Act (FMLA) and the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), do require that certain types of benefits be provided to certain employees. FMLA allows an employee to take medical leave because of the illness of a child, spouse, or parent. COBRA gives employees and their family members who lose health benefits the right to choose to continue group health benefits for limited periods under certain circumstances. Because of DOMA, few of the mandatory protections provided by ERISA, FMLA, or COBRA are applicable to domestic partners. In fact, state statutes that may require ERISA covered employee benefits to be provided to domestic partners are generally preempted by ERISA. One exception is a recent ruling by the Department of Labor that allows employees in same sex relationships to take FMLA protected leave to care for the child of that employee s same sex domestic partner, while simultaneously denying such employees the right to take protected leave to care for an ill same sex domestic partner. Other, more recent federal legislation that has had a limited effect on the provision of domestic partner benefits is the Pension Protection Act of 2006 (PPA). The PPA allows (but does not require) employers to provide that a participant in a retirement plan may take a hardship withdrawal of funds from his or her retirement plan account to pay for certain expenses (medical, tuition, and funeral expenses, for example) of his or her domestic partner if the domestic partner is the named primary beneficiary under the retirement plan. The PPA requires that nonspouse beneficiaries, such as domestic partners, be able to roll over a deceased participant s account balance to a specific type of individual retirement account, avoiding adverse tax consequences for a domestic partner following an employee participant s death. As described above, few, if any, employee benefits are provided to domestic partners by 2

3 federal law, but plenty of regulation applies if such benefits are provided. Whether state law is applicable to employee benefits depends in part on whether the specific benefits are subject to the broadly inclusive ERISA preemption rules, which in turn depend on (1) whether an employer is subject to ERISA (most employers, other than governments or churches, are), (2) whether the benefit provided is an ERISA plan benefit (that is, an administrative scheme ) or a payroll practice (for example, a one time severance payment to a single employee), and (3) whether an exception to ERISA s preemption clause exists (ERISA does not preempt state laws regulating insurance, banking, or securities). If ERISA preemption does not apply, it is still possible that a state s policy regarding same sex marriage may be an obstacle to providing domestic partner benefits. Approximately 40 states have their own version of DOMA so called mini DOMAs, which limit legal marriage to that between a man and a woman. Mini DOMAs, however, do not always limit the potential for legally recognized same sex relationships other than marriage or prohibit a state from recognizing a same sex marriage performed in another state. Because some states do provide legal recognition for domestic partner relationships, certain benefit obligations may be required under state law, depending on the legality of the domestic partner relationship in both the jurisdiction under which the relationship was recognized and in the employee s state of residence. If the employee lives in a state that restricts marriage to opposite sex couples, an employer does not need to recognize same sex marriage for plan eligibility purposes. But, if an employee resides in a state that recognizes same sex marriage, then an employer may have to recognize a same sex marriage for health plan eligibility purposes, depending on whether the employer s health plan is self insured or fully insured. Self insured plans (that is, plans that pay for benefits out of a company s general assets) are governed only by ERISA and have flexibility on whether or not to recognize valid same sex domestic partnerships. Insured plans may be subject to state law benefit mandates and may have to recognize same sex marriages depending on where the policy is issued. In addition to state laws, many local governments have created so called equal benefits ordinances that require companies contracting with the local municipality to provide spousal equivalent benefits to same sex domestic partners (often referred to as contractor laws ). These ordinances require companies that bid or contract to do work with a city or state to offer equal benefits to all employees. Under such ordinances, generally an employer that offers benefits to employees spouses must offer the same benefits to domestic partners. Cities that have passed such laws include Los Angeles, Minneapolis, San Francisco, and Seattle. What Benefits Are Offered to Domestic Partners? Despite the fact that a dizzying array of federal, state, and local rules can apply to the provision of domestic partner benefits, private employers generally have great latitude to structure and implement domestic partner benefit policies. In fact, hundreds of companies have enacted policies to protect and provide at least some spousal equivalent rights and benefits to same sex employees. For example, as of March 2011, the Human Rights Campaign found that 433 (87%) of the Fortune 500 companies had implemented nondiscrimination policies that include sexual orientation. Any employee looking to reach out to an employer regarding the receipt of domestic partner benefits might well start with benefits that are easy for an employer to implement and that cost the employer little or nothing. The easiest benefits for employees with domestic partners to procure are those that are not governed by ERISA. These benefits include voluntary benefits such as long term care insurance or home and automobile insurance that employers can generally extend to domestic partners without incurring much additional cost because the employee pays the full cost of the benefit (while taking advantage of the group rate provided to the employer). Other nonfederally regulated benefits include life insurance, employee discounts, moving/relocation expenses, or bereavement and funeral expenses. Employees also can encourage employers to revise their own internal nondiscrimination policies to prohibit sexual orientation discrimination. Although employers are not required to adopt such broad policies (remember, federal law does not ban discrimination on the basis of sexual orientation), a revised policy sends a message to employees that discrimination of any type will not be tolerated in the workplace. The most common and probably the most sought after domestic partner benefit offered by employers may well be the extension of health, dental, and vision coverage to domestic partners of employees. Employees who opt to enroll a domestic partner in these benefits pay a married or employee plus one health care premium to cover the domestic partner in the same way that an employee with an opposite sex spouse would pay for spousal coverage. Employees receiving these types of benefits need to be aware of the corresponding tax implications of doing so, as discussed below. Many employers that permit employees to enroll a domestic partner in their company s health plan also extend continuation coverage to domestic partners on the termi 3

4 nation of their coverage in the health plan. This is so called COBRA equivalent coverage because it is generally equivalent to coverage that must be extended to employees and their opposite sex spouses and dependent children under COBRA. Although domestic partners are generally not entitled to continuation coverage under COBRA (because of DOMA s federal law definition of spouse ), many employers that permit domestic partners to participate in their health plans also permit domestic partners to extend coverage in a manner consistent with COBRA coverage. COBRA equivalent coverage can be offered to domestic partners with little cost for the employer because, under many employers plans, the employee would pay the full cost of the cov erage for an opposite sex or same sex partner. Also, employees are often interested in acquiring leave rights similar to those required to be provided to opposite sex spouses by the Family and Medical Leave Act (FMLA). Such FMLA equivalent benefits allow an employee to take paid time off from work to care for the illness of a domestic partner or for the birth or adoption of a domestic partner s child. Employers that do provide such FMLA equivalent benefits are still required to provide rights under the FMLA and must permit employees to take FMLA protected leave even if such leave occurs in the same year that the employee takes leave under the employer s FMLA equivalent policy. Although somewhat less common, employees can ask an employer to extend spousal survivor benefits under a defined benefit pension plan to an employee s domestic partner. This benefit is being offered more and more often, especially to couples who have entered into a same sex marriage. Tax Implications A particularly confusing aspect to offering domestic partner benefits is the differing treatment of the value of these benefits under federal and state income tax laws. Federal law requires employers to impute the fair market value of health care coverage provided to an employee s domestic partner as income to the employee that is subject to federal income tax, unless the domestic partner otherwise qualifies as the employee s tax code dependent under IRC 152. Even in Connecticut, Iowa, Massachusetts, New Hampshire, New York, and Vermont, where same sex marriage is legally recognized, same sex spouses and domestic partners cannot qualify as the employee s spouse for federal income tax purposes because of the DOMA definition of spouse. Domestic partners also rarely qualify as an employee s federal tax dependent because of the narrow definition of dependent under the federal tax code. In addition, unlike premiums for opposite sex spouses, the cost of a nondependent domestic partner s health coverage cannot be paid on a pre tax basis under a so called cafeteria plan and instead can be paid by the employee only with after tax premiums. In addition, the employee cannot seek reimbursement for the cost of the coverage from a health reimbursement arrangement or flexible spending account. States have adopted conflicting approaches to the treatment of domestic partner benefits for state income tax purposes. The vast majority of states have chosen to follow the federal law approach by enacting their own versions of the federal DOMA as either a state constitutional amendment or as a state statute that limits the definitions of marriage and spouse to opposite sex couples for all purposes of state law. These states impute the fair market value of health care coverage for an employee s domestic partner as income subject to state income tax, in the same manner as required by federal law. California, Connecticut, Iowa, Massachusetts, New Jersey, New York, and Vermont have taken the opposite approach by enacting state laws that specifically exempt domestic partner benefits from state income taxes. An additional hurdle for employees looking to convince employers to provide domestic partner benefits is that employers that offer domestic partner benefits in states that do not impute income on the values of such benefits to an employee must structure their payroll systems to tax employees on the value of these benefits for federal purposes, but not for state purposes. In addition, these employers should allow employees to pay for domestic partner benefit coverage on a pre tax basis for state law purposes. Taxation of benefits under federal and state tax rules can be complex and difficult even for employers to handle correctly. Employees should consult with a tax advisor regarding the tax implications of their same sex relationship as it relates to their specific employment conditions. In most states, employees with domestic partners are taxed on the value of employer provided coverage and must pay the employee s premiums on an after tax basis, and therefore can end up paying significantly more for coverage than an employee covering a spouse. Employees who recognize this disparity can ask an employer to provide a gross up of the income of employees covering their domestic partners by the amount that the employees must pay in taxes for their domestic partners coverage. Because an employee must pay tax on the gross up, when making the request of the employer, an employee should ask that the amount of the gross up include both the amount of the tax that the employee would pay for the domestic partner s coverage and the amount of the tax that the employee would pay on the gross up itself. Of course gross ups, like so many employee benefits, are made by employers strictly on a voluntary basis. 4

5 In Sum This area of law is subject to almost constant change as states and the federal government continue to grapple with legal definitions of, and rights for, same sex couples. Beginning in 2011, the Obama Administration, through Attorney General Eric Holder, has refused to defend (but continues to enforce) the federal definition of marriage contained in DOMA. At the same time, the constitutionality of DOMA continues to be the subject of a number of court cases. Nevertheless, until federal and state approaches to same sex relationships are further aligned, the legal landscape for providing these mostly voluntary benefits will remain subject to often conflicting local, state, and federal rules. 5