Domestic Partner Benefits

Domestic Partner Benefits

Many employers provide health insurance coverage to the domestic partners of their employees. Domestic partner benefits generally include medical and dental insurance, but they may also include disability and life insurance, family and bereavement leave, education and tuition assistance, relocation and travel expenses, and inclusion of partners in company events.

Since same-sex marriage is now legal in every state, some employers are dropping their domestic partner benefits and requiring that couples get married in order to qualify for employee benefits. However, some employers—especially those that offer same-sex and opposite-sex domestic partner benefits—are continuing to provide domestic partner benefits for a variety of reasons.

Employers that decide to drop their domestic partner benefits should consider providing a grace period before the change takes effect in order to allow domestic partners time to marry or to make other benefits arrangements.

Reasons for Offering Domestic Partner Benefits

Companies offer domestic partner benefits for many reasons. Some of the most commonly cited reasons for providing domestic partner benefits include:

  • Hiring and retentionDomestic partner benefits can have a positive impact on attracting and retaining top talent by recognizing that some people need health benefits for their partners, but prefer not to marry.
  • Improved employee productivity—One purpose of a benefits program is to provide a safety net for employees and their families, thereby allowing them to better focus on work. Employee morale and productivity improve in environments where employees believe that the employer values them. Offering domestic partner benefits is a way for employers to adapt to the changing needs of their employees by expanding the eligibility of existing benefits programs.
  • Union demands—Companies may offer benefits as a result of collective bargaining in which an employee union has determined that a majority of the employees request domestic partner benefits.
  • Ethical concern for others—Many employers offer domestic partner benefits for ethical reasons, like to allow non-married couples to have the same rights as married ones.

State law requirements—Some states, such as California, have laws that require health insurance coverage for domestic partners.

Reasons for Not Offering Domestic Partner Benefits

Companies choose not to offer (or to eliminate) domestic partner benefits for many reasons. Some of the most commonly cited reasons for not providing domestic partner benefits include:

  • Availability of same-sex marriage—Some employers offered same-sex domestic partner benefits because employees did not have the option to legally wed their same-sex partners. Because same-sex marriage is now legal in all 50 states, some employers have decided to require employees to marry their domestic partners within a certain timeframe or risk losing their partners’ health insurance coverage.
  • Fraud concern—Another reason cited for not offering domestic partner benefits is the fear that employees will misrepresent their relationships to obtain benefits for individuals who are not their domestic partners. To address this concern, many employers require employees to sign a legally binding statement attesting to the existence of the partnership.
  • Adverse selection—Because domestic partner relationships do not usually have the same legal implications as marriage, employees may be more likely to enter into a domestic partnership just to obtain health benefits.
  • Tax issues—Administering domestic partner benefits can be complex. These benefits are often subject to different tax rules than benefits for spouses. For example, unless the domestic partner is a tax dependent of the employee under federal tax law, an employee will be taxed on value health benefits provided by an employer to a domestic partner. Such benefits will also have employment tax consequences for the employer.

Definition of a Domestic Partner

There are no uniform rules defining a domestic partner, and not all areas have state or local laws or regulations that define the term. Some employers choose to establish their own definitions, while others reference state or local law domestic partner registration systems. Commonly used plan requirements stipulate that domestic partners:

  • Have lived together for a specified period (generally, at least six months);
  • Share financial responsibilities;
  • Are not blood relatives;
  • Are at least 18 years of age;
  • Are mentally competent;
  • Intend that the domestic partnership be of unlimited duration;
  • Register as domestic partners if there is a local domestic partner registry;
  • Are not legally married to anyone or engaged in another domestic partnership; and
  • Agree to inform the company if the domestic partnership terminates.

Some plans require that affidavits affirming domestic partner status be submitted to plan administrators, and that an employee submit a “termination of domestic partnership” form if the partnership ends.

When drafting plans, employers should clearly state what benefits are available to domestic partners. They should also consider whether the plan will extend eligibility to the dependents of domestic partners. Beyond that, summary plan descriptions (SPDs) must clearly state the eligibility rules for domestic partners and the scope of the benefits provided to domestic partners.

Tax Implications

Legally married same-sex couples are entitled to the same benefits and protections under federal law as opposite-sex married couples. This rule applies only to same-sex marriages that are valid under state law. It does not affect same-sex couples in civil unions or domestic partnerships. These couples are generally ineligible for the federal benefits provided to spouses.

A domestic partner is not a legal spouse for federal tax purposes. An employer is obligated to report and withhold taxes on the fair market value (FMV) of  a domestic partner’s health coverage to the extent the coverage is paid for by the employer. This is not true for health insurance coverage for legal spouses (including same-sex spouses).

There is no clear rule on what constitutes FMV. The FMV of coverage is determined based on the amount an individual would have to pay for the particular coverage in an “arm’s-length” transaction. It does not depend on usage of the coverage or claims actually paid or the cost incurred by the employer. FMV is usually determined by calculating the difference between the cost of employee and employee-plus-one coverage or by using the plan’s applicable COBRA premium for the coverage, without the 2 percent surcharge. Also, any amount paid by the employee on an after-tax basis for the coverage should be subtracted from the FMV to determine the taxable amount.

Some employers “gross up” an employee’s salary to cover the cost of additional taxes from the imputed income of domestic partner benefits. Employers should disclose the methodology used for imputing employee income to employees. This would allow affected employees to make informed decisions about the cost of coverage and the tax consequences of providing their domestic partners with health coverage through their employers.

Domestic partner benefits may be considered non-taxable only if the domestic partner qualifies as a “dependent” under the definition of a “qualifying relative” pursuant to Internal Revenue Code (IRC) Section 152. To qualify as a dependent, the domestic partner must have the same primary address as the employee/taxpayer for the year and be a member of the employee/taxpayer’s household. In addition, the domestic partner must receive more than half of his or her support for the year from the employee/taxpayer. Traditionally, plans ask that the employee certify the following: that the domestic partner is the employee’s tax dependent as of the date that the annual enrollment form is completed; and that the employee expects that the domestic partner will continue to be the employee’s tax dependent for the upcoming year.

If an employee’s domestic partner qualifies as a tax dependent, the value of the health coverage and benefits paid under the health plan are tax-free to the employee and domestic partner.  A domestic partner does not have to be claimed as a “dependent” on the employee’s federal tax return in order to be eligible for tax-free health coverage. Furthermore, a domestic partner’s child is unlikely to be the employee’s dependent because, in most cases, the child will be the qualifying child of another taxpayer, such as the domestic partner or the child’s other parent.

Legal Considerations

Some states have laws that address domestic partner benefits, such as laws requiring that any employer that provides health insurance benefits to employees’ spouses must offer the same benefits to domestic partners of employees. States may also have laws that allow employees to take job-protected leaves to care for their domestic partners. Employers should stay up to date with applicable state laws impacting domestic partner benefits.

The Employee Retirement Income Security Act of 1974 (ERISA) and the IRC are federal laws that are directly applicable to domestic partner benefits. ERISA governs private sector, employer-sponsored welfare and retirement plans. ERISA generally preempts state laws that relate to employee benefit plans but not state laws that regulate insurance. As such, state insurance law may require coverage of domestic partners in plans that are otherwise regulated by ERISA. However, a fully insured health plan may be treated differently than a self-insured health plan.

The following paragraphs discuss federal employee benefit provisions as they relate to domestic partner benefits:

Flexible Spending Accounts (FSA)

Money contributed on a pretax basis to an FSA can be used to pay for medical expenses not covered by health insurance. Unless a domestic partner qualifies as a tax dependent under the IRS definition, an FSA cannot be used to cover the medical expenses of a domestic partner, even if the employer offers domestic partner health insurance benefits.

Health Savings Accounts (HSA)

Medical expenses incurred by, or on behalf of, a domestic partner are ineligible for tax-free reimbursement from an HSA unless the domestic partner qualifies as a tax dependent.

Group-term Life Insurance

Group-term life insurance on an employee is excludable from income, up to a certain limit. This exclusion does not apply to group-term life insurance for a spouse, another family member or any other person. In terms of this exclusion, domestic partners are treated no differently than spouses.

Specifically, domestic partners cannot obtain group-term life insurance in an employer’s group insurance plan on a tax-advantaged basis. Domestic partners can, however, be named as a beneficiary of life insurance purchased by an employee (his or her domestic partner) or by an employer for the employee to the same extent as legal spouse.

 

HIPAA

Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), special enrollment rights apply when employees gain new dependents or when dependents lose coverage. The extent to which domestic partners are eligible for special enrollment depends in large part on the particular health plan’s eligibility rules. However, HIPAA special enrollment rights are not triggered when an employee acquires a domestic partner.

COBRA

The Consolidated Omnibus Budget Reconciliation Act of 1995 (COBRA) requires that a group health plan provide continuation of coverage when certain triggering events cause an employee, the employee’s spouse and/or a dependent child to lose coverage under the plan terms. COBRA-triggering events may include termination of employment, divorce or a dependent no longer qualifying as a dependent under the plan terms. Domestic partners cannot qualify as “spouses” for COBRA purposes and do not have their own COBRA election rights.

Even though an employee’s domestic partner has no independent COBRA rights in the instance of a qualifying event, an employer may choose to extend comparable benefits with the approval of the insurance carrier or HMO. If the former employee elects and pays for COBRA coverage in a timely way, he or she can add the domestic partner to the plan during an open enrollment period. The domestic partner’s plan coverage will end when the former employee’s COBRA coverage ends. If the domestic partner’s children are covered as dependents under the plan, they will be qualified beneficiaries in connection with any COBRA qualifying event.

FMLA

The Family and Medical Leave Act of 1993 (FMLA) is a federal policy designed to offer leave annually for certain family or medical reasons. A domestic partner is not considered a spouse for FMLA leave purposes, even if the partner qualifies as a tax dependent. Though many do, an employer is not legally required to extend family and medical leave to an employee to care for a domestic partner.

Also, the Department of Labor (DOL) has recognized the eligibility of same-sex partners, whether married or not, to take FMLA leave to care for a partner’s child, provided that they meet the in loco parentis requirement of providing day-to-day care or financial support for the child.

Conclusion

Employers need to be aware of the complicated benefits, employment and tax issues that accompany domestic partner benefits. Before extending benefits to domestic partners, an employer should determine the status of the domestic partner rules in each state in which it operates. Understanding the needs and changing nature of your workforce will make it easier to decide whether to offer domestic partner benefits.

Pregnant Workers Fairness Act

Fair Employment – Pregnant Workers Fairness Act

The federal Pregnancy Discrimination Act prohibits employers with 15 or more employers from discriminating against individuals based on pregnancy or related medical conditions. Massachusetts has enacted a similar law that applies to a broader range of employers in the state. This Employment Law Summary provides an overview of Massachusetts’ Pregnant Workers Fairness Act (PWFA), which was signed into law on July 27, 2017, and went into effect on April 1, 2018.

PWFA OVERVIEW

Effective April 1, 2018, the PWFA requires Massachusetts employers that have six or more employees to provide reasonable accommodation for their employees’ pregnancies or pregnancy-related conditions upon request, unless it would cause undue hardship. The law also prohibits these employers from discriminating against employees and applicants based on pregnancy or related conditions. Under the PWFA, conditions related to pregnancy include (but are not limited to) lactation and the need to express breast milk for a nursing child.

REASONABLE ACCOMMODATION REQUIREMENTS

If an employee or applicant is capable of performing the essential functions of a job but requests an accommodation for pregnancy or a related condition, the PWFA requires the employer to either:

  • Provide the requested accommodation; or
  • Engage in an interactive process with the individual to determine an effective, reasonable accommodation.

Examples of reasonable accommodations for pregnancy and related conditions include:

  • More frequent or longer breaks (paid or unpaid);
  • Time off to attend to a pregnancy complication or recover from childbirth (with or without pay);
  • Acquisition or modification of equipment or seating;
  • Temporary transfers to less strenuous or hazardous positions;
  • Job restructuring;
  • Light duty;
  • Private non-bathroom spaces for expressing breast milk;

Assistance with manual labor; and

  • Modified work schedules.

Other types of accommodations may be reasonable as well. However, the PWFA does not require employers to:

  • Discharge or transfer any employees who have more seniority than an individual who needs an accommodation; or
  • Promote any employee who is not capable, with or without a reasonable accommodation, of performing the essential functions of the job.

MEDICAL DOCUMENTATION

Under the PWFA, employers may require employees to provide medical documentation regarding:

  • The need for an accommodation; and
  • Any extension of an accommodation beyond its original terms.

However, employers may not require medical documentation for any of the following accommodations:

  • More frequent restroom, food or water breaks;
  • Seating;
  • Limits on lifting more than 20 pounds; and
  • Private, non-bathroom space for expressing breast milk.

UNDUE HARDSHIP EXCEPTION

An employer may deny a reasonable accommodation only if it can demonstrate that the accommodation would impose an undue hardship on its program, enterprise or business. “Undue hardship” is defined as an action requiring significant difficulty or expense. In making a determination of undue hardship, the following factors are considered:

  • The nature and cost of the needed accommodation;
  • The overall financial resources of the employer;
  • The overall size of the employer’s business, in terms of the number of its employees and the number, type and location of its facilities; and
  • The effect on expenses and resources or any other impact of the accommodation on the employer’s program, enterprise or business.

PROHIBITED PRACTICES

The PWFA prohibits employers from:

  • Denying an employment opportunity to an individual based on the employer’s need to make a reasonable accommodation for the individual’s known pregnancy or related condition;
  • Failing to reinstate an employee to her original employment status or to an equivalent position with equivalent pay and benefits once she no longer requires a reasonable accommodation for pregnancy or a related condition;
  • Requiring an individual to accept an accommodation that is not necessary to enable her to perform the essential functions of the job;
  • Requiring an employee to take a leave of absence instead of another reasonable accommodation that may be provided without undue hardship on the employer’s program, enterprise or business; and
  • Discharging or in any other manner discriminating or retaliating against an individual because she requests or uses a reasonable accommodation.

ENFORCEMENT

The PWFA is administered and enforced by the Massachusetts Commission Against Discrimination (MCAD). Individuals who believe their rights under the PWFA have been violated must file a complaint with the MCAD within 300 days after the date of an alleged violation.

After a complaint is filed, the MCAD will conduct an investigation to determine whether probable cause exists for crediting the allegations in the complaint. If the MCAD determines that probable cause does exist, it may:

  • Engage the employer in conference, conciliation or persuasion to eliminate the unlawful practice;
  • Conduct a hearing;
  • File a lawsuit in court against the employer; or
  • Grant permission to the individual who filed the complaint to sue the employer in court.

In addition, an individual who files a complaint with the MCAD becomes authorized to file a lawsuit against the employer once 90 days have passed since the complaint was filed. To be valid, a lawsuit must be filed within three years after the date of the alleged violation.

If the MCAD or a court determines that an employer has violated the PWFA, the employer may be ordered to:

  • Hire, reinstate or promote any individual who was affected by the violation;
  • Pay back wages to any affected individual;
  • Pay any costs or attorney’s fees associated with the action; and
  • Pay civil fines of up to $50,000.

NOTICE TO EMPLOYEES

Employers subject to the PWFA must provide written notice to each of their employees regarding the right to be free from employment discrimination based on pregnancy and related conditions. This notice may be included in a handbook, pamphlet or other written document and must be distributed to all existing employees no later than April 1, 2018. On and after that date, employers must give the notice to:

  • Each new employee, at or prior to the commencement of his or her employment; and
  • Any employee who notifies the employer of a pregnancy or related condition, within 10 days after receiving the employee’s notification.

MORE INFORMATION

Contact Group Benefits Strategies or visit the MCAD’s website for more information on employment discrimination laws in Massachusetts.

Section 125 Part 3

Section 125 – Qualified Benefits

A Section 125 plan must offer employees a choice between at least one taxable benefit (such as taxable compensation) and one or more qualified benefits. Benefits that are not qualified benefits cannot be offered under a Section 125 plan. The following table lists commonly offered employee benefits and indicates whether they are qualified benefits that can be offered under a Section 125 plan.

Employee Elections

Prospective Only

Participant elections under a Section 125 cafeteria plan must be made before the first day of the plan year or the date taxable benefits would currently be available, whichever comes first. Typically, employees make their elections each year during an annual open enrollment period, with the elections taking effect on the first day of upcoming plan year. Employees who become eligible for benefits during a plan year (for example, new hires), will usually make their elections during an initial enrollment period.

There are two exceptions to the general rule that Section 125 plan elections must be made on a prospective (not retroactive) basis:

• Limited exception for new hires – Elections that new employees make within 30 days after their hire date can be effective on a retroactive basis. Elections made during this enrollment window can be effective as of the employee’s date of hire.

 • HIPAA special enrollment – Special enrollment rights apply when an employee acquires a new dependent through marriage, birth, adoption or placement for adoption. When a new dependent is acquired through birth, adoption or placement for adoption, coverage must be effective retroactively to the date of birth, adoption or placement for adoption. Employees’ elections under a Section 125 plan may be retroactive to correspond with this HIPAA special enrollment right.

Irrevocable for Entire Plan Year

Participant elections generally must be irrevocable until the beginning of the next plan year. This means that participants ordinarily cannot make changes to their cafeteria plan elections during a plan year. Employers do not have to permit any exceptions to the election irrevocability rule for cafeteria plans. However, IRS regulations permit employers to design their cafeteria plans to allow employees to change their elections during the plan year, if certain conditions are met.

Cafeteria plans may recognize certain events as entitling a plan participant to change his or her elections (if the change is consistent with the event). Although a cafeteria plan may not be more generous than the IRS permits, it may choose to limit to a greater extent the election change events that it will recognize.

For an employee to be eligible to change his or her cafeteria plan election during a plan year, the following general rules apply:

1. The employee must experience a midyear election change event recognized by the IRS.

2. The cafeteria plan must permit midyear election changes for that event.

3. The employee’s requested change must be consistent with the midyear election change event.

Also, employees’ midyear election changes must be effective prospectively. The one exception to this rule is for retroactive election changes that are permissible under the HIPAA special enrollment event for birth, adoption or placement for adoption.

Some of the IRS’ midyear election change events apply to all qualified benefits that can be offered under a cafeteria plan. However, other midyear election change events only apply to certain qualified benefits—for example, not all of the IRS’ midyear election change events apply to elections for health FSAs.

The irrevocable election rules do not apply to a cafeteria plan’s HSA benefit. An employee who elects to make HSA contributions under a cafeteria plan may start or stop the election or increase or decrease the election at any time during the plan year, as long as the change is effective prospectively. If an employer places additional restrictions on HSA contribution elections under its cafeteria plan, then the same restrictions must apply to all employees. Also, to be consistent with the HSA monthly eligibility rules, HSA election changes must be allowed at least monthly and upon loss of HSA eligibility.

Next, Part 4 – Permitted Election Change Events
Return to Part 2

Section 125 – Part 2

Section 125 – Eligibility Requirements

In order to qualify for tax advantages, a Section 125 plan must satisfy the requirements of Code Section 125 and underlying IRS regulations, as summarized below.

 

  • A description of the benefits available through the plan, including the periods of coverage;
  • The plan’s rules for employee eligibility;
  • The procedures governing employees’ elections under the plan, including when elections may be made, when they are effective, and any exceptions to the irrevocability rule;
  • The manner for making contributions (for example, pre-tax employee contributions, employer contributions or both) and the maximum amount of contributions; and
  • If the plan includes a flexible spending arrangement, a description of the special rules that apply to these accounts (for example, the uniform coverage and use-or-lose rules for health FSAs).

The plan document for a Section 125 plan may be comprised of more than one document. For example, the Section 125 plan document may incorporate by reference benefits that are offered through separate written plans, such as a health FSA, without describing these benefits in full. Also, other Code sections require plan documents for certain qualified benefits, including a health FSA, DCAP and adoption assistance. These requirements can be satisfied by including these benefits in the Section 125 plan document.

A Section 125 plan may be amended, or changed, at any time during a plan year.  However, amendments must be made in writing and can only be effective for periods after the later of the adoption date or the effective date of the new amendment, unless otherwise permitted by the IRS.

 

Eligibility Requirements

Any employer may sponsor a Section 125 plan for its eligible employees. This includes private sector businesses, including corporations, partnerships, limited liability companies and nonprofit organizations, as well as public sector employers.

Also, as a general rule, an employer may allow any common law employee to participate in its Section 125 plan. In addition, former common law employees (for example, COBRA participants receiving severance pay) and leased employees, as defined under Code Section 414(n), may participate in an employer’s Section 125 plan.

While only employees are allowed to make elections under a Section 125 plan, a Section 125 plan may provide non-taxable benefits for an employee’s spouse, dependent child who is under age 27 or tax dependent. A “spouse” means an employee’s spouse as defined under federal tax law, including same-sex and opposite-sex spouses. This definition, however, does not include domestic partners. Thus, a Section 125 plan cannot provide non-taxable benefits for an employee’s domestic partner who is not a tax dependent.

Additionally, although individuals who are not considered employees, such as self-employed individuals, partners in a partnership and more than 2 percent shareholders in a Subchapter S corporation, can sponsor a Section 125 plan for their employees, these self-employed individuals cannot participate in a Section 125 plan on a tax-favored basis. Likewise, directors of a corporation who are not also employees cannot participate in a Section 125 plan on a tax-favored basis.

Next Part 3- Qualified Benefits

Return to Part 1

Compliance Tip:

Many of the benefits that may be provided through a Section 125 plan are subject to the Employee Retirement Income Security Act (ERISA). ERISA includes its own set of requirements for written plan documents and SPDs, which are different from the Section 125 plan document requirements. Employers should confirm that their employee benefit documents comply with both sets of requirements, as applicable.

Impact of Noncompliance: According to the IRS’ 2007 proposed regulations, if there is no written plan document in place or if the written plan document does not comply with the content or timing requirements, employees’ elections between taxable and nontaxable benefits will result in taxable income to the employees.

Relationship to Health Plan Eligibility: An employer’s group health plan may be designed to cover individuals who do not qualify for tax-free health coverage (for example, children who are older than age 27, grandchildren or domestic partners). Under the Section 125 rules, an employee may only pay pre-tax for coverage of a spouse, a child under age 27 or a tax dependent. As a general rule, coverage for other individuals should be paid for on an post-tax basis.

Section 125

Section 125 – Cafeteria Plans Overview

A Section 125 plan, or a cafeteria plan, allows employees to pay for certain benefits on a pre-tax basis. Specifically, employers use these plans to provide their employees with a choice between cash and certain qualified benefits without adverse tax consequences. Paying for benefits on a pre-tax basis reduces the employees’ taxable income and therefore reduces both the employees’ and the employer’s tax liability.

In order to receive these tax advantages, a cafeteria plan must comply with the rules of Internal Revenue Code (Code) Section 125 and related Internal Revenue Service (IRS) regulations. Under these rules, a Section 125 plan must have a written plan document and can only offer certain qualified benefits on a tax-favored basis. While self-employed individuals may maintain a Section 125 plan for their employees, only common law employees may participate in the plan.

In addition, once an employee makes a Section 125 plan election, he or she may not change that election until the next plan year, unless the employee experiences a permitted election change event. Also, in order for highly compensated employees to receive the tax advantages associated with a Section 125 plan, the plan must generally pass certain nondiscrimination tests.

 

Cafeteria plan basics

Code Section 125 allows employers to establish a type of tax savings arrangement, called a Section 125 plan or cafeteria plan, for their employees. A Section 125 plan provides employees with an opportunity to pay for certain benefits on a pre-tax basis, allowing them to increase their take-home pay. Employers may also make nontaxable contributions to a Section 125 plan for their employees.

Under a Section 125 plan, employees choose between at least one taxable benefit (such as taxable compensation) and one or more qualified benefits. Qualified benefits include, for example, the following commonly offered employee benefits:

• Group health plans;

• Vision and dental plans;

• Disability and life insurance;

• Health flexible spending accounts (FSAs)

• Dependent care assistance programs (DCAPs)

• Health savings account (HSAs).

According to the IRS, a Section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without causing adverse tax consequences to the employees. To avoid taxation, the Section 125 plan must meet the specific requirements of Code Section 125 and underlying IRS regulations.

Tax Rules: Employees who elect to participate in a Section 125 plan agree to contribute a portion of their salaries on a pre-tax basis to pay for the qualified benefits. These contributions, which are called “salary reduction contributions” are not considered wages for federal income tax purposes, and are generally not subject to Social Security and Medicare tax (FICA) or federal unemployment tax (FUTA). This reduces employees’ taxable income, which results in a savings for both employees and employers.

Next- Part 2 Eligibility Requirements