Common Law Spouses, Same- Sex Spouses, Domestic Partners and Other Nontraditional Family Issues in Employee Benefits

Transcription

1 Common Law Spouses, Same- Sex Spouses, Domestic Partners and Other Nontraditional Family Issues in Employee Benefits Ruth Streit and Trish Winchell 1 Common-Law Marriage Generally Same as a ceremonial marriage in that it is a civil contract for marriage. Fewer and fewer states recognize common-law (CL) marriage. Currently only 9 states and the District of Columbia recognize CL marriage (AL, CO, KS, RI, SC, IA, MT, OK and TX). 4 states only recognize CL marriages created before a certain date (GA, ID, OH and PA). NH recognizes CL marriage for inheritance purposes but only after death of one party. UT recognizes CL marriage but only after validation by court or administrative order. 2 Common-Law Marriage Generally Each state has its own requirements for a CL marriage, but in general: Capacity to contract. Present intent and agreement to be married by both parties. Cohabitation. Holding themselves out as husband and wife (public reputation of being married). 3 1

2 Common-Law Marriage Generally All states recognize a CL marriage that is validly entered into in a state that recognizes CL marriage. There is no such thing as a CL divorce must go through regular divorce process under state law. 4 CL Marriage and Pension Plans Under federal tax law, reference to a spouse includes a CL spouse recognized under applicable state law. This affects qualified plan requirements such as pre-retirement survivor annuities, qualified joint and survivor annuities, consent requirements for non-spousal beneficiary designations, required minimum (age 70½ distributions), direct rollovers, and qualified domestic relations orders. 5 CL Marriage and Pension Plans Pension plan administrators should have procedures in place setting forth the requirements for establishment of CL spouse or surviving spouse status. One large client s procedures include the following: 401(k) Plan Death Benefits If the participant designatedtheindividualclaimingcl spousestatusas a beneficiary, or if theindividual claiming CL spouse status consented to the participant sdesignation ofa beneficiary or beneficiariesotherthan theindividual, payment authorized with no furtherinquiry. 6 2

3 CL Marriage and Pension Plans If no designation wasmadeor the participant designated anotherindividual(s) as beneficiary without the consent oftheindividualclaimingclspousestatus, furtherinquiry must bemade as discussed below with respect to defined benefit plans. Defined Benefit Plans Review theparticipant spersonneland benefit files to determinewhetherany informationsupportsor conflictswith thecl spouseclaim, such as medicalplan enrollment. When verification isnecessary, request further documentationsuch as completionofa questionnaire (for comparison with theclspouserequirementsof the applicablestate). 7 CL Marriage and Pension Plans If doubt remains, or thereare competingclaims, request an affidavit supportingstatementfrom individuals having knowledge of the relationship (providedby theindividualclaimingclspousestatus). 8 CL Marriage and Welfare Plans Under federal tax law, CL marriages are recognized. CL spouses may receive tax-free employer-provided health care. Medical expenses incurred by a CL spouse may be reimbursed under a health FSA. Dependent day care expenses of a disabled CL spouse may be reimbursed under a dependent care FSA. Although CL marriage is recognized under federal tax law, ERISA welfare plans are not required to cover CL spouses. 9 3

4 CL Marriage and Welfare Plans May choose to exclude. If so, plan definition of Spouse: Spouse shall mean the individual lawfully married to the Eligible Employee. For this purpose, an individual will only be treated as a Spouse if such individual and the Eligible Employee took part in a ceremonial marriage that is memorialized by a marriage certificate issued by an entity entrusted with the appropriate legal authority to recognize such marriage. A common-law spouse shall not be considered a Spouse of the Eligible Employee. If choose to cover, require substantiation. See sample Affidavit of Common-Law Marriage 10 Domestic Partnerships, Civil Unions, Same-Sex Marriage Overview Domestic Partnership Varying state definitions of domestic partnership ( DP ): Same-sex /opposite sex/opposite sex over age 62. Registration requiredv. no registration. Does not rise to the level of marriage, but certain consequences depending on the state: e.g., inheritance, hospital visitation, family medical leave. Examples: Maine, Nevada, Oregon, Pennsylvania, Washington, Wisconsin. 11 Domestic Partnerships, Civil Unions, Same-Sex Marriage Overview Civil Union Aims to give same-sex couples the same rights and benefits afforded to opposite-sex couples in marriage. Examples: New Jersey, Illinois, Rhode Island, Hawaii, Delaware. 12 4

5 Domestic Partnerships, Civil Unions, Same-Sex Marriage Overview Same-Sex Marriage Same rights and benefits afforded to opposite-sex couples in marriage. Recognized in 6 states (Connecticut, Iowa, Massachusetts, New Hampshire, New York, Vermont) and DC. 13 Domestic Partnerships, Civil Unions, Same-Sex Marriage Overview Most states do not recognize, and those that do vary in their recognition of these relationships. These relationships are not recognized under federal law. Defense of MarriageAct 14 Defense of Marriage Act ( DOMA ) Signed in 1996 by President Bill Clinton. 2 relevant provisions: For purposes of any federal law, agency ruling or regulation (including federal tax law, ERISA, COBRA and Social Security benefits), marriage means a legal union between one male and one female, and spouse refers only to a husband or wife of the opposite sex. 15 5

6 Defense of Marriage Act ( DOMA ) Unlike CL marriage, no state, territory, possession of the U.S. or Indian tribe is required to give any effect to a relationship of persons of the same sex treated as a marriageunder the laws of another state or territory, etc. In July 2010, one federal court held DOMA unconstitutional. 16 Defense of Marriage Act ( DOMA ) The Department of Justice entered an appeal in October However, in February 2011, President Obama concluded that DOMA was unconstitutional and directed the Department of Justice to stop defending the law in court. But the law is still on the books and dictates how these individuals must be treated under federal laws governing employer plans and taxation of benefits. 17 Effect on Pension Plans Survivor Benefits. Defined Benefit Plans Pre-Retirement. If the only pre-retirementdeath benefit isthe required qualified pre-retirementsurvivorannuity, no death benefit availableto DP. If a non-spousaldeath benefit isavailable (for example, a cash balance plan death benefit equalto the cash balance account) participantcould namethedp the beneficiary; however, benefit would haveto bepaid in a lump sum or immediateannuityto satisfy 401(a)(9) requirements. Plan could also provide for DP as default beneficiary if no designation was made by the participant (subject to same payment restrictions). 18 6

7 Effect on Pension Plans Defined Benefit Plans Post-Retirement. Availability ofdp survivorbenefit dependson available plan payment options. AutomaticQJSA/spousalconsent rulesdo not apply to DPs. Defined Contribution Plans Pre-Retirement. Participant could designatedpas beneficiary but 401(a)(9) restrictionson deferral of payment. Plan could also provide for DP as default beneficiary if no designation was made by the participant. Spousalconsent to designationofnon-spouse beneficiary not applicable DP not treated as spouse. 19 Effect on Pension Plans Defined Contribution Plans Post-Retirement. Same as pre-retirement unlessplan providesan annuity option and participant electsa survivorannuity. Qualified Domestic Relations Orders (QDROs). Not available to DP or former DP. Direct Rollovers. DP treated as non-spousebeneficiary only allowed to transfer to an inherited IRA. 20 Effect on Pension Plans Safe Harbor Hardship Withdrawals in Defined Contribution Plans. Plan may providethat if an event (includingmedical expenses) would constitutea hardship if it happened to the participant sspouseor dependent, theevent will constitutea hardship if it happensto a person who is the participant sbeneficiary undertheplan. IRS has informally indicated a plan may not provide a narrower rule limiting the beneficiaries to DPs. 21 7

8 Effect on Welfare Plans Insured plans state laws that regulate the business of insurance are saved from ERISA preemption. Therefore, in a state where one of these relationships is recognized, there may be a law that requires an insurance policy issued in that state to cover a DP, civil-union partner or samesex spouse. Self-Insured Plans ERISA preempts any state law requiring coverage of a DP, civilunion partner or same-sex spouse. 22 Welfare Plan Coverage of DP, Civil- Union Partner or Same-Sex Spouse If intend to exclude: You do not need to specifically exclude DPs or civil-union partners if plan only covers spouse. However, no harm in being specific. You should specifically exclude same-sex spouses: Example: Spouse shallmean the individuallawfully married to the EligibleEmployee. Forthispurpose, an individualwillonly betreated as a Spouseif such individualand theeligibleemployeeareof theopposite sex. 23 Welfare Plan Coverage of DP, Civil- Union Partner or Same-Sex Spouse If you intend to cover: Have to decide which group(s) you will cover. Same-sex spouses only? Civil-union partners only? Same-sex spouses and civil-union partners? DPs? Same-sex and opposite-sex? Mostplansuseplandefinition (asopposedto state s) because not all states recognize DPs, state law varies regarding definition, and some states don t require registration. See sample Domestic Partner Affidavit and Declaration See sample Affidavit of Termination of Domestic Partnership Useof plandefinitionof DPwillcover same-sexspousesand civil-union partnersas well. DP children? 24 8

9 For purposes of this discussion, DP includes same-sex spouse or civil-union partner. Under federal tax law, can only provide taxfree health coverage to the employee s spouse, dependent or child under age 27. Because of DOMA, the employee s DP is not a spouse. 25 DP would have to qualify as a federal tax dependent for health coverage purposes. See sample Summary oftax TreatmentofHealth CoverageProvided fordomesticpartners and CertificationofDependentDomesticPartner Status. In general, employeemust provideoverhalfof DP s support, DP must residein the employee shomeand use such homeas principalresidence, DP must be a memberof employee shouseholdand therelationship must not be in violation oflocal law. 26 It is very unlikely and only remotely possible that a DP child would qualify as the employee s federal tax dependent or as the employee s child. 27 9

10 Health benefits paid to a DP or DP child who does not qualify as a dependent or child are not taxable income to the employee to the extent coverage is paid for with AT contributions. FMV of the coverage over the amount paid by the employee for such coverage on an AT basis is includible in the employee s income and is subject to federal income tax withholding, FICA and FUTA. 28 The COBRA rate for employee-only coverage (minus the 2% admin charge) is a reasonable amount to use for FMV. Imputed income should be assessed with respect to each DP and DP child who is not a dependent or child. 29 Example 1: Employee covers himself and his DP. The bi-weekly employee-plus-one contribution rate is $ The bi-weekly employee-only rate is $ The employee-only COBRA rate (minus 2%) is $ The employee pays $50.30 on an after-tax basis and $51.53 ( $50.30) on a pre-tax basis for employee-plusone coverage. The employee should be assessed $ ($ ) in imputed income

11 Example 2: Employee covers himself, his 2 children, his DP and his DP s child. The bi-weekly family rate is $ The bi-weekly employeeonly rate is $ The employee-only COBRA rate (minus 2%) is $ The employee pays $ on an after-tax basis (the employeeonly rate times 2 for the DP and DP s child) and $51.86 ($ $100.60) on a pre-tax basis for family coverage. The employee should be assessed $ ($ ($ x 2)- $100.60) in imputed income. 31 State Tax Consequences of Providing DP Health Coverage State tax treatment of DP benefits varies. In general, most states follow federal tax law. If employee certifies that the DP is the employee s federal tax dependent, then the employee can pay for such DP coverage on a PT basis at both the state and federal levels, and the employee is not assessed imputed income on such DP coverage at both the state and federal levels (and therefore is not taxed on any imputed income at both the state and federal levels). 32 State Tax Consequences of Providing DP Health Coverage However, some states provide that employees will not be taxed on the value of DP benefits at the state level. See the chart entitled: State Tax Treatment of Domestic Partner/Civil Union Partner/Same-Sex Spouse Health Benefits. If the employee cannot certify that the DP qualifies as the employee s federal tax dependent, but lives in a state that doesn t tax DP benefits and provides the requisite documentation, then the employee is not assessed imputed income at the state level only

12 COBRA and DP Benefits Same-sex spouses, civil-union partners and DPs are not COBRA qualified beneficiaries. Definition of COBRA qualified beneficiary includes only the employee s spouse and dependent children. Because of DOMA, a same-sex spouse is not a spouse under COBRA. Civil-union partners and DPs are not dependent children. 34 COBRA and DP Benefits Query whether a DP must be eligible for COBRA because of the COBRA rule that coverage made available to a former employee who is a qualified beneficiary must be identical to the coverage available to similarly-situated active employees. Does coverage include eligibility? Query whether a DP child is a COBRA qualified beneficiary. The DP child probably has to qualify as the employee s federal tax dependent in order to be a COBRA qualified beneficiary. 35 Change in Status Event Issues Contributions for DP coverage generally on an AT basis, so Code Section 125 rules are not required to be applied. However, there are 2 HIPAA special enrollment rules where employee must be allowed to enroll a DP mid-year: DP had othercoveragewhen first becameeligible undertheemployer splan, declined employercoverage and then lost the othercoverage (includingmedicaid and CHIP). DP becomeseligiblefor a Medicaid or CHIP premiumassistance subsidy forthe employer splan

13 Change in Status Event Issues Determine under what circumstances DP coverage may be added or dropped. Plan document should be clear on when changes may be made