Employers need to do their homework when offering domestic partner benefits

The culture wars continue to play out on television and in legislative halls across the country, but in business, hardheaded practicality often takes precedence over anyone’s ideals. Indeed, from an employee recruitment and retention standpoint, many employers feel that they can no longer afford to live in an Ozzie and Harriet world.

Particularly in a city like Madison, where the Creative Class is ascendant, employers who offer domestic partner benefits to same-sex couples often have an edge over those who don’t.

But federal law – in particular the Defense of Marriage Act – must be navigated before considering such benefits.

“More and more employers are adding [health care] coverage; that’s the trend in some of the surveys that I’ve seen on domestic partner coverage,” said Cindy Van Bogaert, a partner at Boardman Law Firm who specializes in employee benefits. “They’re adding coverage for a variety of reasons, or finding that from an equity standpoint it seems like they should offer it if they offer coverage. From a competitive standpoint, they see that employees may go elsewhere if they see an employer is not offering it.”

On Nov. 15, Van Bogaert will conduct a seminar on “Domestic Partner Employee Benefits: New Issues and Continuing Challenges” at the U.S. Bank Building Conference Center in Madison. The seminar will seek to answer several questions employers might have about domestic partner benefits, including what the Defense of Marriage Act means for employers, who qualifies as a domestic partner, how federal taxes work when domestic partner benefits are offered, how COBRA-like benefits can be offered, how benefits for children of domestic partners can be handled, and more.

It’s an issue that’s growing in importance, with 33% of state and local government employees and 29% of private-sector employees now receiving access to same-sex domestic partner benefits, according to the Bureau of Labor Statistics.

The biggest sticking point, according to Van Bogaert, is how to handle the federal tax implications of offering domestic partner benefits. Specifically, under the Defense of Marriage Act, same-sex partners are not afforded the same preferential treatment that married couples receive under federal tax law.

“Even if you live in a state where you could get married as a same-sex couple, for certain federal purposes, employee benefit plans that are sponsored by employers aren’t allowed to recognize that status, and they have to treat you as a non-spouse,” said Van Bogaert. “There are some things you can do as an employer to acknowledge the relationship, but you can’t cross that line.”

And when it comes to federal taxes, there’s a big difference between being married and being in a domestic partnership.

“The tax treatment for me as an employee, if I have family coverage with an opposite-sex spouse, let’s say it’s $1,000 a month, all of that is going to be pretax,” said Van Bogaert. “The thousand dollars is not going to show up on my W-2. If I am somebody with a same-sex partner with family coverage, usually what you’ll see is that the value of the COBRA premium for a single individual would show up as imputed income.”

So, for example, if one’s partner is covered through an employer plan and that imputed income equals $400 (the cost of the premium each month), it would ultimately be subject to taxation.

“So $4,800 of taxable wages is what I’d have at the end of the year, whereas someone who has an opposite-sex spouse would not. So it’s an extra step from the employer’s standpoint to get that tax burden right. It’s also a communication issue with the employee you offer the benefits to – to communicate that there’s this different tax treatment.”

One way for an employee to get around the federal tax implications is to designate his or her domestic partner as a federal tax dependent. However, to do that, the employee must provide more than half the partner’s support for the year, and the partner must live with the employee year-round and make less than $3,650 per year.

Staying alert

In February, the Obama administration announced that it would no longer defend the constitutionality of the Defense of Marriage Act. At the same time, however, the administration signaled that federal agencies would continue to abide by the law.

So with change potentially on the horizon, it could be tempting to some employers to let their guard down. That would be a mistake, says Van Bogaert.

“I really think that’s one thing employers must be aware of is that, even though they hear about these laws being challenged, it’s still the state of the law that they can’t treat domestic partners as if they truly were spouses for all purposes, because of the Defense of Marriage Act,” said Van Bogaert.

Aside from getting the imputed tax treatment right – which Van Bogaert says is the “trickiest thing” about navigating domestic partner benefits – eligibility questions and communication issues also present potential problems.

“If you look at it from an employer standpoint, one of the first things to think about is eligibility,” said Van Bogaert. “You have to think through and you have to modify your plan documents and your summary plan descriptions that are given to employees so that they appropriately describe who’s covered and who’s not.

“An example would be, if I’m going to cover domestic partners, how do I describe that, because there’s no federal definition of a domestic partner. So what happens is that plans come up with their own definitions, and they might look at things like some sort of affidavit that talks about the fact that you’re in a committed relationship, and describes different elements that the plan sponsor comes up with. … The key issue once you’ve defined who’s going to be a domestic partner is that you have to define it clearly enough and then you can communicate it clearly to the employees so that they know and you don’t end up covering people who aren’t supposed to be covered or getting into a dispute about it.”

Health care reform, which many business owners are currently trying to get their heads around, must also be considered.

“Under health care reform, one of the issues is coverage of dependents age 26 and up,” said Van Bogaert. “The coverage of dependents age 26 would not include the children of domestic partners, it would be someone who is actually the child of the employee, so that’s one of the things to watch for with respect to the health care law.”

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