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Labor Logic

By: dmc-admin//March 24, 2004//

Labor Logic

By: dmc-admin//March 24, 2004//

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Prosser

John D. Finerty, Jr.

The Massachusetts Supreme Court’s decision in Goodrich v. Department of Public Health, Case No. SJC-08860 (Nov. 18, 2003), put the issue of gay marriages on the front page of newspapers across the country. The effect of this ruling and anticipated federal and state legislation on employers may be felt in the area of health insurance because some employers elect to provide health insurance coverage for domestic partners.The following are a few issues to consider and help insure that your plan or your clients’ plans comply with the law.

Are Domestic Partner Health Insurance Benefits Required?

Neither federal nor state laws currently require that employer-sponsored health insurance plans cover domestic partners. Specifically, the Employee Retirement Income Security Act or ERISA, which governs private employee welfare and pension plans, generally preempts any state or local law that would require insurance coverage for domestic partners. Therefore, any change in state or local laws would likely be subject to preemption.

Further, the federal Defense of Marriage Act, 1 U.S.C. § 7 defines “marriage” as a “legal union between one man and one woman as husband and wife …” The DOMA also precludes any state from recognizing same sex marriages made legal in other states. See 28 U.S.C. § 1738. Employers may elect, but are not required, to provide insurance benefits for domestic partners.

Tax Issues

There may be tax consequences to the employee if an employer provides domestic partner coverage and pays for all or a part of the benefits. The issue is whether the domestic partner is a “spouse” or a dependent of the employee within the meaning of IRS Code § 152. In that case, the benefits may be provided tax free; if not, the
employee must be taxed on the benefits paid for by the employer that are provided to the domestic partner.

The employee must be taxed on the “fair market value” of the coverage for the domestic partner, less any after-tax amounts paid by the employee. Some states, such as California, make domestic partner coverage tax free for state tax law purposes.

To qualify as a spouse for Section 152 purposes, there must be a “legal union between one man and one woman as husband and wife” as set forth in the DOMA. That means an employee’s “same-gender domestic partner does not qualify as the ‘spouse’ of the employee” under the IRS code. A domestic partner, however, may be a dependent within the meaning of the code.

A dependent under IRS Code § 152 is defined as someone who “receives more than half of his or her support from the taxpayer for the tax year and who has the home of the taxpayer as his or her principle abode and is a member of the taxpayer’s household during the entire taxable year of the taxpayer.” See IRS Private Letter Ruling No. 2003-39001 (June 13, 2003); IRS Code § 152(a)(9). An individual is not considered a member of the taxpayer’s household, however, if the relationship violates local law. See IRS Code § 152(b)(5).

FSA and COBRA Issues

Flexible Spending Accounts or FSAs are savings accounts funded with pretax dollars that can be used to pay for medical expenses, including over-the-counter medications. Domestic partners are eligible to use an employee’s FSA only if the domestic partner is also a dependent under IRS Code § 152. Domestic partners that do not qualify as dependents are not eligible for an employee’s FSA reimbursements.

Also, under COBRA, a domestic partner is not a spouse but he or she may have some COBRA rights. A covered employee who elects COBRA, for example, may have the right under a plan to maintain coverage for a domestic partner. A domestic partner, on the other than, may be treated differently than a spouse for termination purposes. That is, while a divorce may trigger COBRA benefits for the non-employee spouse; domestic partner benefits are determined by the plan design.

Preventative Measures to Address Recent Events

Conflicting state laws are being passed across the country. As of today, Wisconsin does not recognize same-sex marriages or civil unions. Vermont, on the other than, recognizes civil unions but not same-sex marriages. There are measures employers can take to address same-sex marriage or domestic partner issues now.

Review insurance policies to see if the plan defines “spouse” for coverage purposes. If the plan provides no definition, consider adding one, either now or at the next renewal period. The plan may be free to define a “spouse” to include same sex marriages or domestic partnerships and, thereby, extend benefits. If so, be careful to address the tax issues for benefits provided to non-dependent domestic partners.

For more information on this topic or for help drafting or amending an insurance plan, contact John D. Finerty, Jr. at Michael Best & Friedrich at (414) 225-8269 or on the Internet at [email protected].

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