Compliance Considerations for Domestic Partner Eligibility

More and more frequently, young adults are foregoing traditional marriage and entering into other forms of partnership arrangements. To appeal to these generational preferences, many employers are looking to expand benefit eligibility to account for the nontraditional partnership arrangements, so that these individuals are eligible to participate in the group insurance plans and other employee benefits they sponsor. These non-traditional arrangements are often difficult to define and can place additional administrative burdens and oftentimes are accompanied by complex legal and taxation requirements.  Already, many fully insured health plans must contend with mandated coverage for domestic and civil union partners depending on their home state for underwriting purposes. 

Employer Action Items

Employers must weigh the importance of extending coverage for domestic and/or civil union partners very carefully. If their primary objective is to offer a welcoming environment to attract and retain employees, improve employee morale and productivity, or they if have purely altruistic motivations, they must be aware taking on increased administrative burdens for their payroll and human resource operations. The decision should not be taken lightly. Here are items of significance for employers:

1. Employers should consider whether the plan will extend eligibility to the dependents of domestic and civil union partners;
2. Employers should clearly state the domestic partnership eligibility rules and the scope of benefits in the Summary Plan Description (“SPD”);
3. Consider state mandated domestic or civil union partner coverage;
4. Employer must consider whether they will employ a state-by-state approach, or a one-size fits all approach across US jurisdictions (generally, the preferred approach)

Eligibility

Eligibility is the biggest question are perhaps the most complex hurdle for employers as plan sponsors. Clearly defining the rules of eligibility for the plans they sponsor not only fulfills important ERISA fiduciary functions, but also dictates the complexity of the administrative environment. While some state jurisdictions have defined “domestic partner” and/or “civil union partner” for purposes of state law and state-level statutory interpretation, the federal government has, to date, made no such move. Thus, establishing, defining, and administering eligibility can lead to big headaches if not performed carefully to take into consideration administrative capabilities of internal operations, as well legal and regulatory requirements for an employer which operate in its functional employment jurisdictions.

The burden then, to define who they wish to cover, falls to the plan sponsor. Does the employer wish to incorporate and mandate cohabitation requirements, age limitations, legally recognized relationships only, etc.?  And if so, who, and by what means, shall the employer make such inquiries and verifications? Respecting enrollees, how shall plan administrators handle life events and relationship changes which might otherwise give rise to enrollment eligibility modification rights, such as marriage, birth, and adoption?  Here again, by whom, and by what means, shall the employer make such inquiries and verifications?

Legal & Regulatory Considerations

Compounding these issues, there are also compliance rules involving multiple substantive areas of law and regulation:

• Taxation at the Federal and State Levels. Opposite and same-sex couples in domestic and/or civil union partnerships are ineligible for federal benefits provided to spouses. For example, a domestic partner is not a legal spouse for federal taxation 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 (unless a domestic partner qualifies as a dependent pursuant to Internal Revenue Code §105(b). This is not true for health insurance coverage for legal spouses. Plan sponsors will need to establish rules within their payroll systems to assure that employees with domestic and/or civil union partners are taxed accordingly and appropriately.
• Health Insurance Portability and Accountability Act (“HIPAA”) Compliance Considerations. Special enrollment rights apply when employees add or lose dependents. The extent to which domestic partners are eligible for special enrollment depends in large part on the health plan’s eligibility rules. However, HIPAA special enrollment rights are not triggered when an employee acquires a domestic partner, or when such domestic partner gives birth to a child or adopts a child.

Consolidated Omnibus Budget Reconciliation Act of 1995 (“COBRA”) Compliance Considerations.

COBRA requires that a group health plan extend continuation coverage eligibility when certain qualifying events cause an employee, the employee’s spouse, and/or a dependent child to lose coverage under the plan. COBRA-qualifying events loss of coverage eligibility associated with separation of service (either termination of employment or reduction of hours of service), divorce, or a dependent no longer qualifying as a dependent under the terms of the plan. A domestic or civil union partner does not qualify as a “spouse” for federal COBRA purposes, and these individuals do not accrue independent COBRA election rights (though, once enrolled, they are eligible to participate in open enrollment events and may make qualifying changes of election in certain circumstances).

Despite the fact that a domestic partner holds no independent COBRA election or participation right 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, they may add the domestic or civil union partner to the plan during an open enrollment period under these limited circumstances. The domestic and/or civil union partner’s coverage will terminate when the former employee’s COBRA coverage ends (if applicable). If the domestic partner’s children are covered as dependents under the plan, they are deemed to be qualified beneficiaries in connection with the occurrence of any COBRA qualifying event.

Family Medical Leave Act (“FMLA”) Compliance Considerations.

FMLA is a federal policy designed to offer leave annually for certain family or medical reasons. A domestic and/or civil union 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 domestic and/or civil union partners. 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 their partner’s child, provided that they meet the in loco parentis requirement of providing day-to-day care or financial support for the child.

• Account-based Product Compliance Considerations. Money contributed on a pre-tax basis to a health FSA may be used to pay for medical expenses not covered by health insurance. Unless a domestic and/or civil union partner qualifies as a tax dependent under the IRS definition, a health FSA cannot be used to cover the medical expenses of the individual, even if the employer offers the domestic and/or civil union partner health insurance benefits. Similarly, medical expenses incurred by, or on behalf of, a domestic and/or civil union partner are ineligible for tax-free reimbursement from an HSA unless the individual qualifies as an IRS defined tax dependent. 

Summary

These and other complex inquiries all make up the underpinnings of employer sponsored coverage eligibility extensions to domestic and/or civil unions partnerships. Employer should be precise and diligent in their development, implementation, and administration of non-traditional partnership benefits. While these benefits lend great rewards for an employer, as well as the employees who attain access to these plan features, with the sponsorship of these benefits also comes multiple governance considerations.

Additional Resources

IRS Frequently Asked Questions – https://www.irs.gov/newsroom/answers-to-frequently-asked-questions-for-registered-domestic-partners-and-individuals-in-civil-unions