Impact on Employee Benefit Plans is Immediate and Significant
On March 21, 2013, Governor John Hickenlooper signed the Colorado Civil Union Act ("the Act") into law, authorizing any two unmarried and otherwise eligible adults, regardless of gender, to enter into a civil union. In doing so, Colorado became the ninth state to legalize such civil unions. The Act took effect on May 1, 2013, and resulted in immediate implications for employers in the state. Employers should take action now to familiarize themselves with the new law, and to review their existing employment practices and employee benefit plans for compliance.
This Client Advisory is limited to a discussion of the impact of the Act on employee benefit plans covering employees in Colorado. The Act also impacts an employer's relations with its employees and other matters, which will be the subject of other Client Advisories. The biggest change under the Act is the extension of all of the rights, privileges, and responsibilities currently afforded to spouses under Colorado state law to civil union partners. However, although Colorado law now recognizes and protects same-sex civil unions, federal law governing employee benefits remains unchanged. Federal law defines marriage as "between one man and one woman," and in many cases of employee benefits, the federal law will preempt this new state law. Therefore, Colorado employers will face the challenge of complying with both state and federal laws that take different approaches to employee benefits.
The status of an employer's employee benefit plans under the Employee Retiree Income Security Act of 1974 ("ERISA") will determine whether and to what extent the Act will apply. ERISA preempts most (but not all) state and local laws that relate to employee benefit plans maintained by non-governmental employers. So, for non-governmental employers with employees in Colorado, the Act will apply only to the extent that employee benefit plans are NOT governed by ERISA. For employee benefit plans maintained by a governmental employer (including cities and towns, special districts and authorities), ERISA does not apply and the Act will apply to the extent permitted under other federal laws (such as the U.S. Internal Revenue Code). Following is a brief summary of the impact of the Act on various employee benefit plans.
Health and Life Insurance Benefits
The following rules will apply:
- Fully insured health and life insurance policies issued in Colorado will be required to offer the coverage mandated by the Act.
- Self-insured health plans that are covered by ERISA will not be subject to the Act's mandate, and employers will have flexibility to define the eligibility of civil union partners as they desire under their health plans. An employer may exclude civil union partners from coverage, or set limits on their eligibility.
- Most governmental and church health plans are exempt from ERISA, and therefore will be subject to the Act.
For employers with plans subject to the Act that are "issued, delivered, or renewed after January 1, 2014", they will be required to amend those plan documents to extend spousal coverage and other spousal benefits to civil union partners.
For some programs like health reimbursement arrangements, health savings accounts, and flexible spending accounts, tax-qualified benefits are only available to spouses and dependents as federal law defines them. Therefore civil union partners still will not be covered under these types of plans unless the civil union partner qualifies as a "dependent" under the Internal Revenue Code.
Due to the requirements of the Internal Revenue Code and ERISA, civil union partners are not entitled to continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), although an employer can extend COBRA-like continuation coverage to civil union partners if it so decides. However, small employers will be required to extend Colorado Continuation Coverage to civil union partners in the same manner that it is extended to spouses.
The Act will require all retirement plans under the Colorado State Public Employees' Retirement System, local firefighter and police pensions, and other retirement plans maintained by governmental employers to offer civil union partners the same benefits currently afforded to spouses, including any default beneficiary status and survivor benefits. In other words, if a spouse is the default beneficiary under a Code Section 457(b) plan maintained by a special district where the participant does not name a beneficiary, a civil union partner now must also be the default beneficiary.
However, the Act will not require non-governmental employers with qualified retirement plans to extend spousal benefits to civil union partners under those requirements, since their plans are governed by ERISA and ERISA preempts the Act. Those non-governmental employers still may want to consider voluntarily amending their plans to treat civil union partners the same as married spouses to the extent permitted under the Internal Revenue Code.
In this case, the Act's requirements will apply to beneficiary determinations (i.e., participant deaths) occurring on or after May 1, 2013, and plan amendments will need to be approved and executed by the last day of the current plan year.
Employers that provide medical, dental, or vision benefits for an employee's civil union partner will be required to ensure that the employee is properly taxed for these benefits. The Internal Revenue Code only excludes from an employee's taxable income amounts paid by the employer for medical care provided to the employee, the employee's spouse, and the employee's dependents as defined by the Internal Revenue Code. Because civil unions are not recognized under the Internal Revenue Code, employers must include the value of any health coverage provided to an employee's civil union partner in the employee's taxable income. This applies to plans governed by the Act, and those that voluntarily provide benefits to civil union partners.
There are limited exceptions to these tax consequences where a civil union partner qualifies as an employee's dependent as defined by the Internal Revenue Code. However, it is generally difficult for a domestic partner to qualify as a "dependent" under the Internal Revenue Code. This will put additional pressure on the employer to require proper documentation of spouses and dependents as they are defined under the Internal Revenue Code to ensure proper tax treatment and withholding.
What Employers Should Do Next
Due to the complex nature of implementing changes to employee benefit plans, employers should review their current plans to determine their options and obligations with regards to the Act as soon as possible. Employers should also begin to address the federal tax consequences of providing benefits to civil union partners.