Employee benefit plans and procedures should be reviewed to ensure compliance with recent significant changes in Washington state’s domestic partnership law. In November 2009, Washington voters approved Referendum 71, confirming the “everything but marriage” law treating state registered domestic partners the same as married spouses under Washington law. The new law was effective Dec. 3, 2009, and creates new compliance issues for employers administering Section 125 cafeteria plans and the underlying benefits. In addition, questions have arisen as to the impact, if any, of the Patient Protection and Affordable Care Act (PPACA) on coverage for domestic partners and children of domestic partners.
This advisory outlines some preliminary steps employers should take to ensure compliance with the law, answers some key questions employers may have regarding health benefits and tax issues, and analyzes how the new law impacts Section 125 plans in comparison to the underlying benefit arrangements.
What steps should employers take to comply with the new law?
Review Section 125 plans. Compare eligibility provisions of the Section 125 cafeteria plan to the eligibility provisions of health and welfare plans and confirm that the tax treatment and general administration of various benefit arrangements are consistent with the documents and the law. (See tax-treatment discussion below).
Review health and welfare plans and summary plan descriptions. Review and update definitions of “spouse,” “child,” and “domestic partner.” Review eligibility provisions for parity between spousal and domestic partner benefits. Consider whether your self-insured plans should have a different definition than your insured plans (see pre-emption discussion below). Revise employee handbooks, participant communications, and internal policies to reflect new benefit provisions for domestic partners.
Review federal tax treatment of domestic partner benefits and update administrative policies and participant communications. Closely monitor developments related to the evolving state and federal treatment of domestic partners. Benefits policies and practices may require subsequent amendment.
What is the new law and what impact does it have on employer provided benefits?
The new law requires state registered domestic partners to be treated the same as married spouses under Washington law. This means that any benefits an employer provides to a spouse must be provided to registered domestic partners, unless Washington law is “pre-empted” (see below).
The new law achieves this result by interpreting certain terms (such as “spouse,” “husband,” “wife,” and “marriage”) throughout Washington law as applying equally to state-registered domestic partners. State-registered domestic partners may be either same-sex partners, or partners of the opposite sex if at least one partner is age 62 or older, and must satisfy certain other requirements. Employers are not required to provide benefits to unregistered domestic partners, but may choose to do so.
To understand how this law impacts the administration of a Section 125 cafeteria plan, it is necessary to first understand how it impacts the underlying insured and self-funded health benefits.
How are insured group health plans affected?
If health coverage or other benefits are provided to married spouses through an insurance policy, such benefits must also be provided to registered domestic partners. This is because insured plans are subject to the state insurance code. No formal amendment to group policies is required. While insured plans are often subject to the Employee Retirement Income Security Act of 1974 (ERISA), ERISA permits the state regulation of “insured” benefits.
How are self-insured group health plans affected?
Most self-insured health and welfare plans are governed by ERISA, which pre-empts state regulation of most self-insured plans. Accordingly, self-insured health and welfare plans governed by ERISA are not required to provide coverage to domestic partners under the new state law.
ERISA plans are governed by federal law, which defines “spouse” under the federal Defense of Marriage Act (DOMA) to mean a person of the opposite sex who is a husband or a wife. Same-sex domestic partners cannot be “spouses” under federal law. To avoid obligations under state law, a self-insured plan should ensure that it defines the term “spouse” in the same manner as that term is defined under DOMA.
Are self-insured plans of church or governmental entities treated differently?
Self-insured governmental and church plans are not subject to ERISA pre-emption and are, therefore, generally subject to domestic partner obligations. However, the State Insurance Commissioner has refused to exercise jurisdiction over these plans. Therefore, compliance violations will likely be enforced only through participant lawsuits.
A church plan may elect to be subject to ERISA. If a church plan has made a valid ERISA election, ERISA will pre-empt state law and the plan will not be obligated to provide domestic partner coverage.
Has PPACA changed federal law to require coverage of domestic partners?
Nothing in PPACA requires coverage of domestic partners. A self-insured ERISA plan may refuse to provide coverage to domestic partners.
Does PPACA require coverage of children of domestic partners?
No, PPACA does not require coverage of children of domestic partners.
Will state law require coverage of children of domestic partners?
Yes, if the benefit is insured. If an insured plan does provide coverage for children, state law will require coverage of a child of a domestic partner to age 25. In theory, an insured plan would not have to provide coverage to a child of a domestic partner to age 26, as required by PPACA. However, as a practical matter, all insurance contracts written in the state will require such coverage.
With respect to an ERISA self-insured plan, PPACA does not require coverage of children of domestic partners, and ERISA will pre-empt state insurance laws. Therefore, while an ERISA self-insured plan, covering dependents, will be required to cover such a dependent to age 26, the ERISA plan could refuse to provide such coverage to children of domestic partners. However, the plan must have a clear definition of “spouse” and “child,” such as a spouse recognized by DOMA and a child of such a spouse, in order to achieve such a result.
Should an employer expect litigation if its self-insured plan excludes either domestic partners or children of domestic partners?
Yes, domestic partner issues and the validity of DOMA are being actively litigated. If successful, an employee could seek retroactive enrollment. Aside from the litigation risk and distraction, an employer who is providing both insured and self-insured benefits should weigh the administrative and staff relations problems associated with having different definitions of “spouse” and “child” for different benefits.
How are Section 125 cafeteria plans affected?
Because Section 125 cafeteria plans are governed by the federal tax code, the definition of “dependent” and “spouse” in cafeteria plans is not changed as a result of changes in state law. Unless a domestic partner qualifies as a dependent under Code Section 105(b), the employee cannot pay for their coverage on a pre-tax basis.
To the extent a health plan provides employer-paid coverage of a domestic partner, the value of that coverage will be treated as imputed income to the covered employee and reported on a Form W-2. If the employee is required to pay all or part of the cost of coverage for his or her domestic partner, those premiums may be paid by the employee with after-tax income. Or, the employee may pay them on a pre-tax basis through the cafeteria plan, but the value of coverage will then be imputed back to the employee.
Because Section 125 cafeteria plans and the underlying group health plans may define “spouse” and “dependent” differently, employers will need to closely compare the plan documents and disclosures to employees. Health care flexible spending accounts, which are self-insured health plans governed by ERISA, will conform the definition of dependent and spouse to federal law, and therefore should not vary the definitions from the definitions used by the Section 125 cafeteria plan.
If a health plan is required to extend coverage to a domestic partner under state law, the employer must be sure that the coverage is properly described to employees and the premiums are properly treated for tax purposes (unless the domestic partner otherwise qualifies as a dependent under Code Section 105(b)).
What are the federal tax implications of domestic partner benefits?
Federal tax rules govern the tax treatment of domestic partner benefits. Generally, if a domestic partner or his/her dependents are an employee’s Internal Revenue Code (Code) Section 105(b) tax dependents, the value of the health coverage is not subject to federal income and employment taxes, and the benefits provided will be tax-free. If a domestic partner or his/her dependents are not Code Section 105(b) tax dependents, generally the employee will be taxed on the premium cost of the insurance provided to the domestic partner. Health care reform changed this tax treatment for adult children, but not for domestic partners.
May employers provide benefits to unregistered domestic partners and opposite-sex domestic partners?
Yes, but employers are not required to do so. If you are making distinctions between registered and unregistered domestic partners and same- or opposite-sex partners, make sure these distinctions are set forth in your plan documents. Such distinctions may raise staff relations issues and claims of discrimination.
Is there a “conscience clause” exception for religious entities?
No, but employers can meet compliance obligations without specifically endorsing domestic partner rights by offering employee+1 adult coverage or adopting a separate category of dependents that encompasses, but is not limited to, domestic partners.
What about COBRA?
While employers may voluntarily offer domestic partners and their dependents a COBRA-like benefit, the new law does not require the extension of COBRA rights to registered domestic partners. However, because COBRA does not apply, make sure that your insurance carrier (or stop-loss carrier in a self-funded plan) has approved such coverage before voluntarily extending coverage to domestic partners.