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The decision to add domestic partner benefits can be complicated by state and federal laws.
Employers that expand benefits eligibility beyond the traditional family—whether they do so because of diversity goals, competition for labor or simply because it seems fair—must address not only the distinct rights of marriage, civil unions and domestic partnerships, but also the ensuing conflicts between local, state and federal laws.
The pace of change in the benefits eligibility of same-sex and opposite-sex domestic partners has accelerated since 2000 when Vermont coined the term “civil union,” reaching its peak on May 17 when Massachusetts became the first state to legalize same-sex marriage. (For more information on recent judicial actions, see “Debating Same-Sex Couples’ Rights”.)
In 38 states, however, laws have been enacted to mirror the federal Defense of Marriage Act of 1996 (DOMA), which defines marriage as a legal union between a man and a woman. Under the act, states are not required to recognize same-sex marriages performed in other states.
In spite of that resistance, the well-publicized changes in some states’ laws, increasing cultural acceptance of nontraditional families and competition for talent may spur HR professionals to consider bringing same-sex or opposite-sex domestic partners or same-sex spouses under their company’s benefits umbrella. Whether they decide to do it voluntarily or in compliance with laws and ordinances, these changes require planning and diligence, because legal changes in domestic partner status could increase the complexity of taxes on benefits, HR professionals and consultants say.
Tricky Tax Questions
The first step toward figuring out how covering these individuals will affect your company’s benefits and payroll systems is to understand the terminology.
Each state has its own individual treatment of same-sex and opposite-sex domestic partnerships, says Paul Cates, director of public education for the American Civil Liberties Union’s Lesbian and Gay Rights Project in New York. While the term “domestic partnership” applies in all cases to unmarried same-sex or heterosexual couples who declare their commitment, the meaning of the term varies with the rights that individual states afford these couples.
“At the low end, domestic partnership is nothing more than a registry” for unmarried same-sex or opposite-sex couples, says James Esseks, litigation director for the project. A state registry helps these committed couples prove their status to obtain health benefits, he says.
“At the high end, California has quite a comprehensive state domestic partnership system,” which, as of January, will give couples many of the rights that the state gives married couples, he says. This law, which is similar to Vermont’s civil unions, differs from marriage in two main ways, he says: Domestic partnerships are entered into and terminated differently than marriages, and couples still must file separate state income tax returns.
HR and benefits professionals with employees in more than one state must understand how different states treat these individuals for state tax purposes. Private letter rulings by the U.S. Internal Revenue Service (IRS) indicate that employment-based health benefits for domestic partners “are excludable from taxable income only if the recipients are legal spouses or legal dependents,” according to an Employee Benefit Research Institute (EBRI) fact sheet.
Other differences also will arise: “Flexible spending account benefits may not be provided to a domestic partner because such accounts can include only nontaxable income,” EBRI states.
While states have the right to legalize same-sex marriage, the federal government prohibits it under the DOMA. “Same-sex partners would not be treated as spouses for federal tax and employee benefit purposes,” the EBRI document explains.
Same-sex marriages “create an inherent conflict with the federal DOMA. Employers are stuck in the middle of that conflict, [which] is likely to be resolved in litigation,” says Ilse de Veer, a principal and benefits consultant with Mercer Human Resource Consulting in Norwalk, Conn.
The federal law will be found unconstitutional, just as state laws banning interracial marriage and sodomy have been struck down as violating the equal protection clause of the 14th Amendment, predicts John A. Haslinger, the New England region health and welfare practice leader for Mellon’s Human Resources & Investor Solutions in Boston. “Same-sex marriage is going to be legal in every state if the federal DOMA is overturned,” he says.
However, Esseks says, “I think [the federal DOMA] should be found unconstitutional, but I’m not sure when it will be challenged. It draws a distinction based on sex and sexual orientation that has no justification.”
If the federal DOMA is struck down and there is no federal definition of marriage, the tax issue becomes more complex, says Ken McDonnell, an EBRI research analyst in Washington, D.C. For example, if an employer in a state that allows same-sex marriages relocates a same-sex married couple to a state that doesn’t recognize such marriages, the way that couple is treated for federal tax purposes is unclear, he says.
Who Gets What
In spite of controversy and IRS headaches, companies have added domestic partner coverage because they want to offer equitable benefits across their employee base, to support diversity in the workplace, and to recruit and retain talented employees. The legalization of same-gender marriages has “heightened the equity issue” for interstate companies, says Andrew D. Sherman, senior vice president of The Segal Co., a national human resources and employee benefits consulting firm based in New York. Workers in same-sex marriages will demand the benefits, he adds.
However, some employers that offer benefits to domestic partners may not do it on the same level as for spouses. “A domestic partner and a [legally married] spouse are not the same thing” in terms of benefits, de Veer says.
For example, many employers offer medical, dental and vision benefits to employees’ domestic partners, but they don’t make domestic partners eligible for the pension plan survivor benefits that opposite-sex spouses receive, de Veer says.
In determining what’s appropriate, “We are urging companies to think about their own goals and objectives of their benefit program and see whom it makes sense to include,” Sherman says. (For an example of one company’s program, see “Domestic Partner Benefits Support Diversity Initiatives,”.)
Haslinger says that based on Mellon’s client population, approximately 10 percent to 15 percent of employers are comfortable offering domestic partner benefits and view it as a civil rights issue. A similar percentage is on the opposite end of the spectrum, finding it “morally reprehensible,” he says. (For more information on these differing viewpoints, see “Religion vs. Sexual Orientation”.)
The Human Rights Campaign (HRC), a Washington, D.C.-based advocacy group for gay, lesbian, bisexual and transgender Americans, has a database of 7,360 employers that offer health care benefits to domestic partners, says Kim Mills, HRC’s education director. About 92 percent of those companies offer them to both same-sex and opposite-sex couples.
According to the Society for Human Resource Management’s 2004 Benefits Survey, 34 percent of 454 respondents say they offer benefits to opposite-sex domestic partners, up from 31 percent in 2003, and an additional 1 percent plan to offer them in the next year. Also, 27 percent of 456 respondents offer benefits to same-sex domestic partners, up from 23 percent in 2003, and an additional 2 percent plan to offer them in the next year. These numbers increased from 2001 to 2002 and remained steady through 2003. (For more information on the survey, see “Employers Offering Domestic Partner Benefits”.)
Even though benefits costs are rising, employers are finding that the addition of domestic partner benefits is not cost-prohibitive. Mills says that benefits rosters at companies that offer domestic partner benefits only to same-sex couples increase less than 1 percent. When the benefits are offered to both same-sex and opposite-sex couples, enrollment increases 3 percent.
Consultants cite similar trends. Companies consistently find that the financial and administrative costs are small, other than the up-front planning and initial setup, Sherman says.
Employers will not be required to extend rights under COBRA to domestic partners. But based on conversations with her clients, Mercer’s de Veer says that most employers will provide continuation of medical coverage, perhaps with minor modifications, such as not offering the coverage to a domestic partner if the relationship ends.
In addition to equity and minimal cost concerns, compliance with state laws and local ordinances increasingly is another reason to offer the benefits, Sherman says. For example, San Francisco, Los Angeles, Minneapolis, San Mateo County, Calif., and Tumwater, Wash., have ordinances stipulating that localities will not do business over a certain dollar value with any contractor that doesn’t offer benefits to domestic partners equal to those offered to married employees. The state of California also has passed such a law. Similar ordinances are in effect in Portland, Maine, and Broward County, Fla.
Another factor to consider, says de Veer, is whether industry competitors are offering such benefits.
Developing a Policy
Companies that are new to the domestic partner benefits issue may find the questions raised by implementation a bit daunting:
Paul Garry, an attorney with Meckler, Bulger & Tilson LLP in Chicago, recommends an affidavit that indicates an exclusive, committed relationship and financial interdependence. Yet, he says, “if companies are committed to providing these types of benefits [voluntarily], they need to be a little flexible” about the proof they require.
Compared with domestic partner benefits, same-sex marriage benefits are more black and white, because any legal marriage—whether the couple is same-sex or heterosexual—is granted all of the rights conveyed to that legal status, Garry says. However, in states with domestic partner statutes, domestic partners must receive medical benefits that are similar to, but not necessarily exactly like, those of married couples.
Before changing a company’s benefits eligibility, Randy Abbott, a Philadelphia-based consultant with the HR consulting firm Watson Wyatt Worldwide, advises human resource professionals to get the support of the benefits committee or management committee of the company’s board of directors in case there is a backlash. That way, the responsibility for the outcome is shared.
“In a publicly held organization, there could be constituents [who] would view this with some degree of moral or social concern,” Abbott says. Make a decision based on business issues, “but be mindful” of that possibility, he says.
Additionally, though the cost of providing health care benefits to domestic partners is small, “it’s still real money in an environment where health benefits are going up 12.5 percent [per year],” Abbott says.
While the domestic partner benefits issue is getting more attention because of the recent spate of legislative activity, Abbott says, the issues haven’t changed. “It becomes a question of business success and having the workforce necessary to run the enterprise,” he says.
One human resource manager who is pondering those questions is Brenda Franklin, SPHR, who works in the banking industry in Fargo, N.D. Franklin says she has been monitoring the issue for the past 1 months. Companies “have some thinking to do before we just jump into it,” she says, citing the tax implications.
When her company does begin making domestic partners eligible for benefits, it would likely start by offering health care coverage, then eventually it may open the entire benefits program to them, she says.
“I don’t think it’s impossible; it’s just new to us,” Franklin says. “When we look at this down the line, we’ll say, ‘What was the big deal about that?’ ”
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