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Baldwin Bulletin

Compliance Considerations for Domestic Partner Eligibility

The Baldwin Group
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Updated: July 8, 2024
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4 minute read

More and more, young adults are foregoing traditional marriage and entering into other forms of sharing relationships. To appeal to these new partnerships, employers are looking to expand who may be eligible to participate in the group insurance plans they sponsor. These non-traditional arrangements are often difficult to define and can place additional administrative burdens on already over-taxed human resources staff.  Note that fully insured health plans may have mandated coverage for domestic partners depending on the situs state.

Employer Action Items

Employers must weigh the importance of extending coverage for domestic partners against the headwinds outlined below. If their objective is to offer a welcoming environment to attract and retain employees, improve employee morale and productivity or, they just think it’s the right position to take, they must be aware that they are also accepting an increased administrative burden for their payroll and human resources staffs. The decision should not be taken lightly. Here are items of significance for employers:

  • Employers should consider whether the plan will extend eligibility to the dependents of domestic partners;
  • Employers should clearly state the domestic partnership eligibility rules and the scope of benefits in the Summary Plan Description (“SPD”).
  • Consider state mandated domestic partner coverage.

Summary

There is no clear definition of a domestic partnership. The burden then, to define who they wish to cover, falls to the plan sponsor. Does the employer want to include cohabitation requirements, age limitations, legally recognized relationships only, etc.?   Then, once the domestic partner is on the plan, how do administrators handle changes in the relationships that might qualify under a cafeteria plan? What if the relationship no longer meets the standard that was set to enter the plan?

On top of these issues, there are also compliance rules involving taxes, Health Insurance Portability and Accountability Act (“HIPAA”), Consolidated Omnibus Budget Reconciliation Act of 1995 (“COBRA”), Family Medical Leave Act (“FMLA”) and tax deferred/preferred benefit design. These issues are worthy of discussion when an employer is considering whether to add domestic partners to their benefit plans. Our discussion will be limited to federal rules only, but there may be complicated state requirements that also will come into play.

Taxes

Let’s start our review with the tax implications of adding domestic partners. Opposite-sex and same-sex couples in domestic partnerships are generally ineligible for the federal benefits provided to spouses. For example, 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 unless a domestic partner qualifies as an Internal Revenue Code §105(b) dependent of the employee. 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 partners are taxed appropriately.

HIPAA

Under 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 health plan’s eligibility rules. However, HIPAA special enrollment rights are not triggered when an employee acquires a domestic partner.

COBRA

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. COBRA-triggering events may include termination of employment, divorce or a dependent no longer qualifying as a dependent under the plan’s 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

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.

Flexible Spending Accounts (“FSA”)

Money contributed on a pre-tax basis to a health 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, a health FSA cannot be used to cover the medical expenses of a domestic partner, even if the employer offers the 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. 

For More Information

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


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