Federal and state laws affecting benefit plans treat same-sex spouses the same as opposite-sex spouses. However, the issue of domestic partners, civil unions, and other unmarried relationships is less clear. The Employee Retirement Income Security Act (ERISA) does not specifically define domestic partnerships, and state definitions vary. Employers often have questions about whether they must extend health coverage to unmarried partners and how to administer their plans if coverage is extended.

Domestic Partnerships and Civil Unions

Although not recognized under federal law, some states have established definitions for “registered domestic partnerships,” “domestic partnerships,” and “civil unions” to extend specific rights and responsibilities under various state laws. A domestic partnership or civil union generally refers to two adults, unrelated by blood and neither is married, who are in a committed relationship and assume responsibility for each other’s financial and emotional needs. Several municipalities and local jurisdictions extend rights to unmarried couples that meet the criteria developed by the jurisdiction. Further, many employers have voluntarily adopted broad definitions of domestic partners to extend eligibility under their group health plans.

Group Health Coverage

Employers may choose to extend eligibility to domestic partners, but it is not required unless mandated by a state’s insurance law. Most states have no requirements, while others, such as New Jersey, merely require group health carriers to offer the employer the option of including domestic partners as dependents. On the other hand, California has the strictest requirement: any group policy covering spouses must extend eligibility to “registered domestic partners (RDPs).” The California Family Code defines RDPs, and the California Secretary of State provides a registration system.

Employers purchasing group health insurance receive specific information from the carrier about applicable state insurance laws. Self-funded (uninsured) plans are not affected since they are exempt from state insurance mandates.

Note: Public-sector employers, such as cities, counties, and public schools and universities, as well as private-sector employers that contract with public agencies, may be subject to additional requirements under local laws. Specific information is typically provided to the parties by the government agency.

Plan Documents

Plan documents must describe the definition of an unmarried partnership, plan features, contribution values, dependent coverages, participant rights and duties, tax issues, and other relevant factors determined by the plan, carrier, tax professional, and legal counsel. Updates to the plan document require updates to the employee’s summary plan description documents and related plan materials.

Tax Issues

In most cases, special tax reporting is required for domestic partner health coverage. Although group health coverage provided to the employee, spouse, and children under age 27 (and some older children) is tax free, the value of any employer-paid coverage for a domestic partner is taxable. The employer must report the fair market value of the coverage, minus any after-tax contributions paid by the employee, as imputed income on the employee’s Form W-2 for federal and state/local tax purposes.

In some cases, however, the employee can avoid taxes on the value of domestic partner coverage:

  • Federal: Coverage is tax free if the domestic partner meets the definition of dependent and the following conditions under § 152 of the Internal Revenue Code:
    • Shares the same principal residence as the employee;
    • Receives more than half of their support from the employee;
    • Is a citizen, national, or legal resident of the United States or resident of Canada or Mexico; and
    • Is not a qualifying child of a taxpayer.
  • State/Local: Most state and local tax laws conform to federal law, so taxes do not apply if the domestic partner is the employee’s tax dependent under § 152. (Nonconforming states may impose state and/or local taxes.) Alternatively, several states specifically exempt certain categories of domestic partners from state or local taxes, even though federal taxes apply. For instance, California does not tax the value of employer-paid coverage for RDPs as defined by state law.

Employers that offer health coverage to domestic partners should refer to their payroll vendor for specific information about the state and local tax withholding and reporting rules in the locations where their employees live and work.

Pre-Tax Contributions

Cafeteria plans allow employees to make pre-tax contributions for group health coverage, but only for employees and their tax dependents (i.e., spouse, children, and § 152 dependents). When a domestic partner does not meet the financial dependency criteria to qualify under § 152, contributions for their coverage would have to be made on an after-tax basis. However, Internal Revenue Service (IRS) regulations permit an accommodation for the employer’s convenience in administering payroll. That is, the cafeteria plan may allow pre-tax contributions for the domestic partner’s health coverage, provided that the full market value of the coverage is reported as the employee’s imputed income. For instance, assume the market value (employer plus employee cost) of the partner’s coverage is $200, the employee contributes $50 on a pre-tax basis through payroll deduction, and the employer contributes the remaining $150. In that case, the employee’s taxable income is reduced by $50 ($50 is the pre-tax withholding from the employee’s payroll), but $200 is the imputed income that is reported on the employee’s Form W-2.

Midyear Enrollment Changes

Special enrollment rules under the Health Insurance Portability and Accountability Act (HIPAA) allow employees to add coverage midyear for a new spouse but not for a domestic partner (since no marriage has occurred). On the other hand, the HIPAA rule for a midyear enrollment in the event a dependent loses their coverage under another plan does apply to domestic partners (if eligible for the employer’s plan).

Cafeteria plans may allow midyear changes per IRS regulations for permitted election changes. Although not required, employers that extend health plan eligibility to domestic partners also often provide for midyear enrollment changes under their cafeteria plans.

Beware of discrepancies between the group health insurance policy and the cafeteria plan document. Carriers are required to include the mandatory HIPAA special enrollment rules in group policies, but they often omit the optional cafeteria plan provisions. Always check all documents and policies before allowing an employee to change midyear. Self-funded employers should ensure that stop-loss insurance protection applies to all eligible persons under the group plan.

FSAs, HRAs, HSAs, and Other Health-Related Benefits

In most cases, domestic partners are not eligible for other health-related benefits. Reimbursements from health flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), and health savings accounts (HSAs) are limited to eligible healthcare expenses for the employee and their tax dependents. Domestic partners are not tax dependents unless the domestic partner qualifies under § 152, which is generally not common.

COBRA

Federal law defines COBRA-qualified beneficiaries as the employee (or former employee), spouse, and children if covered under the group health plan at the time of the qualifying event. A domestic partner, therefore, is not a COBRA-qualified beneficiary in their own right. The employee, however, may elect COBRA for their domestic partner if the group health plan extends eligibility to domestic partners, as defined in the plan documents, since COBRA beneficiaries have the same enrollment options as active employees.

Many states have enacted coverage continuation provisions under their state insurance laws. These often are referred to as “mini-COBRA” laws. Certain states that provide protections for domestic partnerships or civil unions may also extend their mini-COBRA provisions. California is one example. Cal-COBRA (the state’s mini-COBRA law) extends to RDPs as defined by state law. Mini-COBRA provisions, if any, will be described in the carrier’s group policy.

Summary

In summary, employers that choose to extend group health plan eligibility to domestic partners, or that purchase group policies that include state-mandated domestic partner provisions, are encouraged to work with carriers, benefits advisors, and payroll vendors to develop and administer appropriate procedures. All plan materials should contain consistent eligibility definitions, communications should encourage employees to consult their tax advisors regarding federal and state tax laws, and payroll vendors should ensure accurate Form W-2 reporting.