The Illinois Religious Freedom Protection and Civil Union Act (the “Civil Union Act”), effective June 1, 2011, will impact employers and their employee benefit plans in myriad ways.
The Civil Union Act essentially provides the same rights to parties to a civil union (including same-sex and opposite-sex couples) as are provided to married couples under Illinois law, except it does not grant same-sex couples the right to marry. The Civil Union Act guarantees a party to a civil union the same legal obligations, responsibilities, protections, and benefits afforded or recognized by Illinois law to spouses. Furthermore, the Civil Union Act also guarantees recognition in Illinois of marriages, unions, and other legal relationships (other than common law marriages) recognized by other jurisdictions that meet the qualifications of the Civil Union Act.
As a result of the federal Defense of Marriage Act (“DOMA”), benefits provided under federal law generally cannot be offered to individuals who are in same-sex civil unions or marriages. DOMA defines marriage as a legal union between one man and one woman as husband and wife. “Spouse” under DOMA refers to a person of the opposite sex who is a husband or wife. DOMA has been found to be unconstitutional in two federal district court cases in the First Circuit, and is likely to continue to be challenged in the near future. Until the federal rules coordinate with Illinois state rules on the matter, employers will be faced with some degree of complexity in analyzing and properly administering various employee benefit plans and arrangements in compliance with both federal and state laws.
Health Benefit Plans
Employers are likely to face inquiries from their employees about coverage under the employer’s health benefit plans, such as medical, dental, prescription drug, and vision plans. The question of whether the employer must provide coverage to the civil union partner largely depends on whether the health benefit is insured by a contract issued by an insurer subject to the laws of the State of Illinois, or whether the health benefit is only subject to federal law, most notably under the Employee Retirement Income Security Act of 1974 (“ERISA”).
If the employer offers a health plan pursuant to an insurance contract issued in Illinois that provides for coverage of a plan participant’s spouse, then coverage must be extended under the plan to the participant’s civil union partner. If the employer’s plan does not provide for spousal coverage (which is unlikely in the case of most health plans), then the employer would not be required to extend such coverage to the civil union partner. Additionally, an employer would not be required to extend coverage to the civil union partner under a self-insured plan (which would pay benefits from the employer’s general assets, and would be subject to ERISA only) or under a plan that is insured under a contract issued by a state that does not recognize civil unions.
Action Item: Employers should review their health plans to assess the scope of coverage of the definition of “spouse”—i.e., whether civil union spouses would be included. Employers who are required to, or voluntarily opt to, extend coverage under their health plans to civil union spouses should review and accordingly amend their plan documents, enrollment forms and other participant communications. Any amendments of insured plans should be done with the approval of the insurer. If an amendment is not approved by the insurer, the insurer may deny the individual’s claims as not in accordance with the plan’s terms. Depending on the communications to participants about extension of coverage, the employer may then be liable for any medical expenses incurred.
Health Benefit Continuation Coverage Under State and Federal Law
Since federal law does not recognize civil unions, civil union partners would not be entitled to continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”). However, the Illinois Continuation Law (or mini-COBRA), which protects individuals who lose their group health insurance coverage with an employer group of any size may apply to civil union partners.
Action Item: To simplify the continuation coverage process, employers with health plans that cover civil union partners should contact their insurers to seek approval of, and incorporate for the benefit of civil union partners, the continuation coverage process applicable to other plan participants.
Taxation of Health Benefits
Since federal law does not recognize civil unions, health benefits provided to civil union partners should be appropriately taxed. For federal income tax purposes, employers should impute income to the employee equal to the fair market value of the coverage provided to the civil union partner (unless the partner qualifies as a dependent under Internal Revenue Code Section 152). Additionally, non-dependent civil union partners cannot benefit from Internal Revenue Code Section 125 cafeteria plan pre-tax contributions, and the participant may not receive reimbursements for the non-dependent civil union partner’s expenses from flexible spending accounts, health reimbursement accounts or health savings accounts.
On the other hand, for Illinois income tax purposes, the value of employer-provided health benefits would not be taxable to plan participants with non-dependent civil union partners who have health benefit coverage, and premiums may be paid on a pre-tax basis by such plan participants.
Action Item: Employers should adjust their payroll systems for proper tax withholding and reporting.
Employers that provide pension benefits subject to ERISA will not be required to extend spousal benefits to civil union partners under the Civil Union Act, since such pension benefits are solely governed by federal law without any state law nexus. Be that as it may, employers may wish to amend their ERISA pension plans particularly in instances where such amendments would not impose significant costs on the employer or the plan, if any, such as:
- identification of the civil union partner as a default beneficiary if the participant has failed to designate a beneficiary or the beneficiary has predeceased the participant,
- where permitted by the individual account plan, the ability to obtain a hardship withdrawal for certain permitted expenses related to a civil union partner,
- in the case of a defined benefit plan, the ability to elect an annuity that would be payable over the joint lives of the participant and the civil union partner,
- in the case of a defined benefit plan, allowing the civil union partner to receive a death benefit if the participant dies before retirement.
General Action Items for Employers
- Review current employee benefit plans to evaluate current obligations with respect to the provision of benefits to civil union partners
- Communicate with and coordinate any changes to the employee benefit plans, including continuation of coverage matters under COBRA or mini-COBRA, with applicable insurers
- Amend the plan documents, enrollment forms, employee communications such as Summary Plan Descriptions among others, for mandatory and optional changes under the Civil Union Act
- Adjust payroll systems for proper tax withholding and reporting