Equal Benefits Gain Ground

But employers that provide equal benefits to employees with same-sex partners need to track often-conflicting laws.

By Susan R. Heylman Jun 1, 2011
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Employers that provide equal benefits to employees with same-sex partners and spouses confront many challenges. Benefits managers must keep track of conflicting—and changing—state laws on same-sex marriages, civil unions and domestic partnerships. They also must understand differing federal and state tax treatment of equal benefits. And, pending litigation may change the landscape for same-sex benefits.

That landscape has shifted dramatically in the past three decades. In 1982, New York City newspaper TheVillage Voice became the first employer in the United States to offer domestic partner benefits to its employees, according to the Human Rights Campaign, an organization that promotes lesbian, gay and transgender equality. Of the companies on the Fortune 500 list, 58 percent now provide equal benefits for their employees’ same-sex partners and spouses and their dependents, the organization states.

Conflicting Laws

The movement toward equal benefits has gained as more states allow same-sex marriage or unions. Five states—Connecticut, Iowa, Massachusetts, New Hampshire and Vermont—and the District of Columbia issue marriage licenses to same-sex couples.

Eight states have enacted civil union or domestic partnership laws that provide same-sex couples the equivalent of state-level spousal rights, including rights to decide medical treatment for partners, to inherit property, and to seek custody of children and financial support when a relationship ends. These states are California, for same-sex marriages that took place from June 16, 2008, to Nov. 4, 2008; Delaware, as of Jan. 1, 2012; Hawaii, as of Jan. 1, 2012; Illinois; Nevada; New Jersey; Oregon; and Washington. In addition, Maryland, New York and Rhode Island recognize same-sex marriages performed in other jurisdictions.

At the federal level, the Defense of Marriage Act (DOMA) defines marriage as a legal union only between a man and a woman. As a result, same-sex spouses do not qualify for many federal benefits such as Social Security survivor or spousal benefits. And, same-sex spouses are treated as strangers under the federal tax code. They lack the same status and rights as opposite-sex spouses in health and retirement plans regulated by the Employee Retirement Income Security Act (ERISA). Same-sex spouses do not have access to continued employer-sponsored health benefitsunder COBRA. They also cannot take family leave to care for a same-sex spouse or partner under the Family and Medical Leave Act (FMLA).

Similarly, 41 states have a constitutional provision or statute—often called a mini-DOMA—prohibiting state recognition of same-sex spouses or partners. Despite their wide-reaching effects, DOMA and the mini-DOMAs do not prohibit employers from choosing to extend equal benefits to employees’ same-sex spouses or partners and their dependent children. Many business leaders have decided to do so.

The Business Decision

Kimpton Hotel and Restaurant Group, with more than 7,100 U.S. employees, offers equal benefits to all eligible employees, including same- and opposite-sex domestic partners and spouses. Benefits include medical, dental, vision, supplemental life insurance, medical leave and the use of sick days to care for a domestic partner.

“We started offering same-sex benefits in 1997 because we felt that it was the right thing to do,” says Leslie Lerude, vice president for people and culture at Kimpton, based in San Francisco. “We believe in a culture that acknowledges, understands and values the differences among people, and our benefits program reflects this sentiment.”

Similarly, Credit Suisse, a Zurich-based financial services company with approximately 10,000 U.S. employees, strives to provide equal benefits to promote a healthy and diverse workforce, says Elizabeth Donnelly, head of benefits for the Americas. The company extends all of its benefits programs to same-sex and opposite-sex domestic partnersand their dependents worldwide.

For privately held companies, the decision to offer equal benefits may clash with the owners’ traditional views of marriage, notes Jacquelyn Bader, benefits and compliance director for Becker’s School Supplies in Pennsauken, N.J. With 200 employees in six states, Becker’s is a family-owned and -operated company that has offered health, dental and cafeteria-plan benefits for same-sex partners since 2000. To do otherwise would be discriminatory, says Bader, who persuaded the owners that providing equal benefits was the right business decision. “They had to look beyond their personal beliefs,” she says.

An Uncertain Future for the Federal Defense of Marriage Act

Attempts to overturn the federal Defense of Marriage Act (DOMA) through litigation and legislation are pending. Recently, U.S. Justice Department officials announced that Section 3 of DOMA was presumptively unconstitutional as applied to same-sex couples who are legally married under state law. This section excludes same-sex couples from the definition of marriage for purposes of federal programs and special tax treatment. Consequently, department officials announced that they would not defend the constitutionality of Section 3 in two pending cases, Pedersen v. Office of Personnel Management and Windsor v. United States.

However, the House of Representatives has hired a lawyer to defend DOMA.

If DOMA is declared unconstitutional in the courts, the results would be chaotic for employers, says Robert M. Projansky, a partner at the law firm Proskauer Rose in New York City.

"There'll be uncertainty first because you may have one or more circuit courts disagree on this, so employers will be left without guidance on what the appropriate course of action is for federal purposes," he explains. "When the Supreme Court rules, unless it explicitly does it prospectively, there will then be serious questions about when to apply the new reading of the law. For example, would an employer have to redo W-2s for the last tax year, where it reported taxable income and it shouldn't have?"

Federal officials have made it clear that they will enforce DOMA until there is a definitive court ruling finding the law to be unconstitutional or until Congress repeals it. Because federal agencies are still complying with DOMA and for the time being it is the law of the land, the best practice is for employers to continue to administer their plans in compliance with DOMA until the law is no longer in effect, Projansky advises.

Even if personal beliefs don’t pose a problem, employers might be concerned about the higher cost of offering benefits to same-sex partners. And, in fact, there are the costs of the coverage and tax consequences. But concerns about increased health care costs are unfounded, says the Employee Benefit Research Institute. In a 2009 report, it found that providing health benefits to same-sex partners carried no greater risk of increased costs than providing benefits to opposite-gender partners. This is because:

  • Employees eligible for same-sex domestic partner coverage tend to be young and healthy.
  • Enrollment is low. Only 1 percent of eligible employees who are offered domestic partner coverage enroll, primarily because most domestic partners have coverage through their own employers.
  • Any increased risk from AIDS among male same-sex domestic partners appears to be offset by a decreased risk among female same-sex couples.
  • Same-sex couples have a very low rate of pregnancy.

What Employees Want

At Kimpton, medical and dental plans are the most prevalent benefits used by employees with same-sex partners, Lerude says. In many companies, COBRA-equivalent coverage and pension-type benefits also are popular, says Todd A. Solomon, a partner at the law firm McDermott Will & Emery in Chicago.

But each benefit offered to same-sex couples requires separate consideration.

Health benefits. When providing equal health benefits, employers have to navigate ERISA and state insurance laws. ERISA pre-empts state laws relating to employee benefits plans, but it does not trump state laws that regulate insurance. So, a state’s insurance laws may require employers to cover same-sex partners in health insurance plans that also are regulated by ERISA.

Self-insured medical plans and fully insured plans are treated differently under ERISA. Under a self-insured plan, which is governed only by ERISA, an employer is not required to cover same-sex partners but may choose to do so. A fully insured medical plan is subject to state insurance laws, however. An employer that covers spouses would be required to cover same-sex spouses in a state that recognizes same-sex marriage, such as Massachusetts, Solomon explains. The same requirement applies to civil unions in Illinois, he adds.

Continuing health insurance coverage. An increasing number of employers offer employees’ same-sex partners COBRA-type benefits. Some states, such as Illinois and Maryland, have “mini-COBRA” laws that require health plans to provide continued coverage for same-sex domestic partners.

Retirement plans. Employers may amend their retirement plans, such as 401(k) and defined benefit pension plans, to provide equivalent retirement benefits. Even so, same-sex spouses and partners are considered “nonspouse” beneficiaries for 401(k) and IRA distributions and must comply with special tax rules and restrictions.

Family leave. Because of DOMA, employers are not required to offer employees leave under the FMLA to care for a same-sex spouse or partner. But in 2010, the U.S. Department of Labor clarified the definition of “son and daughter” so that an employee who is a same-sex partner may take FMLA leave for the birth or care of a child, regardless of the employee’s legal or biological relationship to the child.

Some states, such as New Jersey and Washington, have family leave acts that cover domestic partners. To provide all employees with leave to care for a same-sex spouse or partner, employers may create a system with FMLA-equivalent leave for them, as Kimpton does.

Other benefits. Many employers offer equal access to adoption assistance, bereavement leave, credit union membership, disability insurance, employee discount programs, life insurance, relocation assistance and tuition reimbursement.

Tax Consequences

Tax issues are the single most complicated aspect of domestic partner benefits, according to Solomon. “You’re treating as taxable income something for federal law but not for state law. It’s what most employers get wrong,” he explains.

Because of DOMA, the Internal Revenue Code treats an employer’s contribution for a same-sex partner’s medical, dental and vision care plan as a fringe benefit and part of the employee’s taxable income. This increases the employee’s taxable gross income and the employer’s payroll taxes.

In 2009, an employee with a same-sex partner paid on average $1,070 per year more in taxes than an opposite-gender married employee with the same coverage, according to estimates from the Williams Institute, a group at the University of California-Los Angeles School of Law whose researchers study legal issues related to sexual orientation.

To reimburse the additional tax costs of same-sex partner coverage, companies can provide extra income known as a “gross-up” to employees. As of March, 15 private employers had instituted a gross-up policy, including Credit Suisse, Discovery Communications, Facebook, Google and Kimpton, according to the Human Rights Campaign. Other businesses and law firms plan to implement gross-ups in 2011. “Kimpton neutralizes the tax impact of imputed income imposed on employees having domestic partner coverage so they are not penalized with higher taxes,” Lerude explains.

State tax treatment of the cost of benefits depends on whether the state has a mini-DOMA. In mini-DOMA states, like at the federal level, benefits provided to a same-sex partner are treated as part of the employee’s taxable income. If the employee lives in a state that has a same-sex marriage or domestic partnership law, then the value of the benefit is not imputed income for state tax purposes.

The author is an attorney and freelance legal writer and editor based in the Washington, D.C., area.

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