| Benefits for Domestic Partners
Imagine your response if Donna, your Customer Service manager, returns from vacation with Beth, her long-time companion, and tells you that while on vacation, they decided to make their partnership official. Donna presents you with a certificate of partnership. Now, Donna wants Beth covered under her life insurance policy and wants to make sure that she will receive health benefits as well. What benefits should be extended to Donna and Beth? What coverage are they entitled to? What do you do? If this scenario or the mere idea of a domestic partnership benefits plan sound far-fetched, they shouldnt. According to the Mellon Financial Institute, 35 percent of employers are now providing domestic partnership benefits compared with 6 percent in 1996.To date, five states have formally recognized same-sex unions. Those states are: Maine, Massachusetts, Vermont, California, and New Jersey. Although Alaska, California, and Hawaii have a statute or constitutional amendments that restrict marriage to a heterosexual couple, two of these statesCalifornia and Hawaiicircumvent the restriction by legalizing the relationship as either a domestic partnership or as a reciprocal beneficiary relationship.
At the federal level, the 1996 Defense of Marriage Act (DOMA) restricts marriage to the legal union between one man and one woman as husband and wife, and according to DOMA, the word spouseErefers only to a person of the opposite sex who is a husband or wife (1 U. S. Code §7). DOMA permits states to refuse to recognize or give effect to any public act, record, or judicial proceeding of any other State Eor a right or claim arising from such relationshipE(28 U. S. Code §1738C). The result is that only a married couple qualifies for federal entitlements, such as veteransEor pension benefits. DOMA also allows states to refuse to recognize same-sex marriages that might be allowed in other states. To date, 38 states have passed a state version of the federal DOMA.
What is a domestic partnership? A domestic partnership is a relationship between two individuals that is usually made up of a same-sex couple, but may also be made up of an opposite-sex couple. The relationship is usually one that cannot be (or is not) legalized by marriage. Different localities have different definitions. What are domestic partnership benefits? Domestic partnership benefits are benefits that an employer may offer at its discretion, where not mandated by law, to an employees unmarried partner that is either of the same or opposite sex. The definition of eligible dependents may vary depending on the benefit plan. For example, it is possible the definition could be broader under the health insurance policy than under the life insurance policy. Why offer domestic partnership benefits? The most commonly cited reasons for offering domestic partnership benefits are fairness and the opportunity to enhance the attractiveness of the organization as a great place to work. Improving employee morale is also a suggested reason for offering domestic partnership benefits. There may also be a local law that prohibits discrimination on the basis of sexual orientation that could result in a finding of illegality based on your failure to provide benefits to domestic partners. What are the arguments against offering domestic partnership benefits? There are a number of arguments made against offering domestic partnership benefits. The most common reasons cited are added costs and administrative burdens. Added costs are of primary concern to most employers. However, a study conducted in 2000 by Hewitt Associates shows that only 1.2 percent of employees in a domestic partnership will take advantage of a health benefit plan. Who should be covered? Who should be offered domestic partnership benefits? The organization may have a local statute it must comply with or may want to extend coverage to those who are not covered by a domestic partnership lawfor example, opposite-sex unmarried couples. Some organizations use the term spousal equivalents,Ewhich can be defined as partners who are unable to legalize their relationship through marriage. Which benefits to consider? Most domestic partners are seeking healthcare insurance and leave benefits. Leave includes bereavement, parental leave, and use of accumulated sick leave to care for a domestic partner. The federal Family and Medical Leave Act (FMLA) does not specifically mention domestic partners, but federal guidelines state that nothing in the FMLA prohibits employers from extending the provisions of the Act to domestic partners. Other benefits offered under a domestic partnership plan are relocation, access to employer facilities, and attendance at employer-sponsored functions.
If you are considering offering domestic partnership benefits, what are the legal requirements? How does the Internal Revenue Service (IRS) treat benefits to a domestic partner and what requirements does the employer have to meet? Is income subject to withholding for federal FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act)? What about health insurance and the Consolidated Omnibus Budget and Reconciliation Act (COBRA)? Although certain states recognize some form of domestic partnerships and have their own requirements, there are some general guidelines to consider when formulating your policy on domestic partnerships and benefits. (Note: An organization should always consult with a lawyer, as well as its insurance company, before offering benefits to domestic partners):
How are domestic partners treated under the Tax Code? Employees with a domestic partner often must pay for coverage with post-tax dollars, and then must pay taxes on the employer's share of payment for benefits of domestic partners as added income because domestic partners do not have status as spouses (under the Defense of Marriage Act (DOMA), discussed in Part I of this series, or as a dependent.
If the employee does qualify as a dependent under the IRC, then payments for healthcare coverage and other benefits will be treated in the same way as coverage for other employees with family coverage. If payment of health insurance premiums is made through a cafeteria plan, the premiums for domestic partner coverage may be deducted from the employee's salary on a pretax basis. If the domestic partner does not qualify as a dependent, the value of the coverage is included in the gross income of the employee, and the value of the coverage-not the amount of the benefits-must be reflected on the employee'sW-2 Form.
For an employee who does not receive tax-favored status, the tax is determined by assessing a fair market value for covering the domestic partner. The amount is then reported on the employee'sW-2 Form and is subjected to Social Security, FICA, FUTA, and federal withholding taxes.
An employee who covers a domestic partner who does not qualify for dependency status must pay taxes on that health coverage. IRS has determined that the amount of the health coverage must be included in the gross income of the employee because it constitutes wages under Code Section 3401(1) and Section 3121(a).The amount of health coverage is, therefore, subject to withholding of income, FICA, and FUTA taxes. The amounts to be withheld need to be deducted from the employee's other pay. In order to avoid any misunderstandings about tax consequences to the employee, many employers include a statement about tax consequences in an affidavit that the employee is asked to sign. An example might be that: federal taxes (federal tax, FICA, and FUTA) and state taxes are deducted for the employee's taxable income for the cost of providing coverage for domestic partners. Additional handouts with additional explanations are also a common practice.
What is the tax treatment for a domestic partner with a Section 125 flexible benefit plan and spending account? Under a cafeteria plan or health flexible spending account (FSA), if a domestic partner does not qualify as the employee's dependent, the employee cannot pay premiums for coverage for that partner on a pretax basis through the premium conversion portion of a Section 125 cafeteria plan. The employee may not submit the domestic partner's healthcare or dependent care expenses for pretax reimbursement from the employee's health FSA, even if the employee paid those expenses.
Federal law denies same-sex couples coverage under COBRA for the nonemployee same-sex spouse (29 U. S. C. §§ 1161 - 1168). Insurance companies are covered by both state and federal regulations and, therefore, may be required under state regulations to extend benefits to a same-sex partner. Before extending such rights, an organization should obtain an insurance carrier's written consent.
The Employee Retirement Income Security Act (ERISA) preempts state and local law so that a same-sex spouse is not recognized and entitled to coverage. An employer has the option to extend ERISA to same-sex spouses and domestic partners, however, certain spousal benefits-such as survivor and pre-retirement annuities under pension plans and the right to death benefits under 401(k) plans-will not be afforded to these couples pursuant to DOMA. It is important to remember that, under ERISA, once an employer writes
a definition of domestic partner into a benefit plan, it is obligated
under federal law to follow that definition when administering the plan.
Therefore, the employer must be very careful |