Domestic Partner Benefits

While opposite-sex and same-sex marriages are permitted nationwide, today’s workforce presents a wide variety of relationship arrangements for which a domestic partner benefit offering provides more flexibility. In addition, while most employers are not required to offer benefits to domestic partners, doing so may provide additional protection against claims of discrimination based on gender. For employers who offer coverage to domestic partners, and maybe to their children as well, it is important to ensure the administration and taxation are handled in a compliant manner.

Eligibility

Federal, State and Local Requirements

Under federal law, employers are not required to offer coverage to domestic partners. However, there are a handful of states (notably California) that do require plan eligibility rules to include registered domestic partners (i.e., those who are formally registered as domestic partners in accordance with state or local laws). These state requirements would generally only apply to fully-insured ERISA plans issued in that state and self-funded non-ERISA plans. Self-funded ERISA plans can disregard state insurance mandates because of ERISA preemption.

In addition, several state and local governments require their contractors to provide domestic partner coverage as a condition of doing business with that government unit. Since these requirements are a condition of the employer being a government contractor, ERISA does not preempt them.

Also, some states and local governments offer formal domestic partner or civil union registries. An employee is not entitled to cover a domestic partner simply because they have registered their partnership on a government registry, unless allowed by the plan or required by state law. An employer who chooses to extend coverage to domestic partners can, but is not required to, limit coverage to domestic partners registered with a state or local government.

Common Law Marriages

There are a few states that still allow residents to enter into a common law marriage, which is a marriage without a marriage license. The requirements for a valid common law marriage vary from state to state. While most states do not allow residents to enter into a common law marriage, all states will recognize a common law marriage that was entered into in a state that allows such marriages.

A common law spouse is not a domestic partner. An employee who has entered into a valid common law marriage is legally married and their spouse entitled to enroll on the plan on the same terms and conditions as any other spouse (unless the plan documents specifically exclude coverage for common law spouses). None of the rules discussed in this guide regarding domestic partner coverage applies to a common law spouse enrolled on the plan.

Conversely, a domestic partner is not a common law spouse unless the employee and partner live in a state that recognizes common law marriages and they have satisfied the requirements necessary to enter into a valid common law marriage in that state.

Domestic Partner Eligibility Rules

Except in those states that mandate domestic partner coverage, there is no uniform definition of who qualifies as a “domestic partner.” That means the plan itself must define what it means for someone to be a domestic partner eligible for coverage under the plan. Some carriers and TPAs have standard definitions they use in their boilerplate plan documents. In other cases, the employer must come up with a definition on its own and/or decide whether to modify the standard definition provided by the carrier or TPA.

Examples of common factors used to define domestic partner status: ·       Age requirement (e.g., 18+) ·       Currently living together and have lived together for some specified period of time ·       Shared financial responsibility such as joint bank accounts, joint lease or mortgage, or shared utility bills ·       Not married to or in a domestic partnership with anyone else ·       Partners are no more closely related than would be allowed for spouses under state law ·       Formal registration on a domestic partnership or civil union registry (keep in mind formal registries are only available in a limited number of states and local jurisdictions, so requiring registration may severely limit the availability of the benefit depending on where employees live)

 

The eligibility rules could also include the children of the domestic partner. Children of a domestic partner in this context refer specifically to children who are not the employee’s own biological or adopted children but rather a status akin to stepchild. Biological or adopted children the employee has with their domestic partner will generally be eligible for coverage regardless of the availability of domestic partner coverage.

Verification of Eligibility

Employers are not required to obtain an attestation or any additional documentation to prove a domestic partner’s status, especially if the employer does not require any documentation from spouses permitted to enroll. However, it is possible to require an attestation of meeting certain requirements or to require evidence of the relationship. A simple attestation that the domestic partner meets the plan eligibility requirements may be sufficient and is often easiest to collect administratively. Employers could take it one step further and require such attestation to be notarized. In addition, employers could require documentation proving things such as a common address or shared finances. Any domestic partner affidavit or attestation should be tailored to match the plan’s specific definition of domestic partner eligibility.

 

Taxation of Domestic Partner Benefits

Many benefits can be offered on a tax-favored basis to employees and to the employee’s spouse and tax dependents, but if benefits are offered to those who do not qualify as the employee’s spouse or tax dependent, then the coverage is taxable. If a domestic partner, or a child of the domestic partner, does not qualify as a Code §105(b) dependent of the employee, the employer must treat the fair market value (FMV) of the coverage provided to the domestic partner or child as taxable income to the employee. This is true not only for medical coverage, but also for other benefits that are typically provided on a tax-favored basis (e.g., dental, vision).

Definition of Tax Dependent

To be a federal tax dependent under Code §105(b), the individual must be a “qualifying relative” or a “qualifying child” of the employee as defined by §152 of the Code with certain modifications. To be a qualifying relative, a domestic partner must meet all of the following requirements:

• Reside at the same address as the employee and be a member of the employee’s household;
• Receive over half of his or her support from the employee;
• Not be anyone’s qualifying child; and
• Be a citizen or national of the U.S., or a resident of the U.S. or a country contiguous to the U.S.

Some domestic partners will qualify as the employee’s tax dependent and can be provided tax free benefits, but many will not.

Some employers also offer coverage to the children of a domestic partner who are not dependent children of the employee. To be the employee’s Code §105(b) dependent, the domestic partner’s child would have to be a qualifying relative of the employee. However, one of the requirements for being a qualifying relative is that an individual must not be a qualifying child of any other taxpayer. A domestic partner’s child will often be a qualifying child of the domestic partner and therefore cannot be the employee’s qualifying relative.

Employers will typically not know whether a domestic partner or child qualifies as a tax dependent of the employee. It is not the employer’s job to determine if a given domestic partner or child qualifies as the employee’s tax dependent; they can require the employee to provide that information.

Some employers include a question on their domestic partner affidavit whether the domestic partner and/or children are the employee’s tax dependent. The IRS has approved the use of employee certifications for verifying tax dependent status.

The employer may also want to adopt a default rule that assumes the domestic partner or child is not a tax dependent unless the employee notifies the employer otherwise. This avoids the problem of the employee failing or refusing to answer because they don’t know and don’t want to pay someone to find out. Plan sponsors should communicate this assumption in benefit communications and then provide an opportunity for employees to submit an affidavit that a domestic partner or their children qualify as a Code §105(b) tax dependent when applicable.

How to Tax Domestic Partner Benefits

When coverage is provided to a domestic partner (or their child) who is not the employee’s tax dependent, the employer must impute the FMV of the coverage as taxable income to the employee. The employee will have imputed income reported on Form W-2 equal to the FMV of the domestic partner’s and/or child’s coverage, and this amount will be subject to payroll taxes (income and FICA taxes).

The IRS has not provided any official guidance about how to calculate the value of a domestic partner’s (or their child’s) health coverage, so there is some flexibility in how the employer determines FMV.

• One common approach is to use the plan’s COBRA premium for self-only (individual) coverage, not including the 2% COBRA administration fee. If coverage is added for more than one individual (e.g., a domestic partner and his or her child), the COBRA premium for that number of individuals could be used.

• Another possible method is to determine the value based on the incremental cost of adding coverage for the individual. For example, if the monthly plan cost for single coverage is $450 and the cost for Employee+1 is $700, the FMV of the domestic partner’s coverage would be $250 ($700 − $450). Note that the FMV in this context is the full cost of the domestic partner’s coverage, including both the employee and employer share of the premium. So, if using this incremental approach, the FMV is the difference in the total cost of single coverage charged by the carrier (or premium equivalency calculated by the TPA) and the total cost of employee + 1 coverage, not the difference in the employee contribution.

In some cases, such as when the employee already carries family coverage, the cost of adding coverage for the domestic partner may be $0.00. But the IRS has made it clear that the coverage still has value and that an appropriate FMV must be included in the employee’s income, even if there is no additional premium due. In these situations, alternative methods may be required, e.g. dividing the family premiums by the number of members in the family unit.

The mechanics of imputing taxable income will depend on how the coverage is paid for by the employer and the employee.

• If the employer covers the full premium for the domestic partner’s coverage (or for his or her child), then the full FMV of the domestic partner’s health coverage must be included in the employee’s income.
• If the employer and employee share the cost of the monthly premium, it can be handled one of two ways:
  • The employee contributions for the domestic partner’s coverage can be paid on an after-tax basis and income imputed equal to the FMV of the domestic partner’s coverage minus the employee’s after-tax contributions; or
  • The employee contributions for the domestic partner coverage can be paid on a pre-tax basis the same as a spouse and then the full FMV of the domestic partner’s coverage must be imputed as taxable income.

Some employers impute income only once a year, adding all the imputed income for the domestic partner coverage to the taxable income reported on the employee’s W-2 at year’s end. Others report the imputed income incrementally throughout the year as the domestic partner coverage is provided. The latter approach allows the employer to calculate and withhold taxes on the imputed income throughout the year and avoid a potential tax surprise for employees when they file their taxes.

Other Compliance Considerations

Health FSA, HRA and HSA Contributions and Reimbursements

Health FSAs and HRAs

Health FSAs and HRAs are generally only available to reimburse qualifying medical expenses of the employee, the employee’s spouse, the employee’s child who has not yet reached age 27 (the domestic partner’s child does not count as a child for this purpose), and the employee’s tax dependents. Therefore, expenses incurred by a domestic partner or the domestic partner’s child who are not tax dependents of the employee cannot be reimbursed from a health FSA or HRA.

There is informal guidance from the IRS in Private Letter Ruling 201415011 indicating that an HRA may reimburse qualifying medical expenses for domestic partners, but only if the value of the HRA is imputed as taxable income to the employee in addition to imputing the value of the domestic partner’s coverage on any accompanying major medical plan (and assuming the domestic partner is NOT the employee’s tax dependent).

HSAs

Contributions

When it comes to contributions to an HSA, what matters is whether the employee is HSA eligible (enrolled in HDHP coverage, not enrolled in non-HDHP coverage) and has single or family HDHP coverage. By definition, any HDHP coverage that is not single coverage is family coverage. It doesn’t matter whether other individuals enrolled on the HDHP are HSA eligible or the employee’s tax dependent.

So, an employee with an HDHP that covers the employee and a domestic partner can contribute up to the maximum family contribution limit. Moreover, since the employee and domestic partner are not married, the special contribution limit for married individuals does not apply and the employee can contribute up to the family maximum regardless of how much the domestic partner contributes to their own HSA.

The domestic partner is also deemed to have family HDHP coverage. So as long as they are not enrolled in any disqualifying non-HDHP coverage, the domestic partner can also contribute up to the family maximum contribution limit into their own HSA (not employee’s HSA). The employer cannot contribute to the domestic partner’s HSA or allow the employee to make pretax contributions to their HSA since the domestic partner is not an employee. But the domestic partner can make their own contributions outside of payroll, again, without having to comply with the special contribution rule for married individuals.

A domestic partner cannot open their own HSA if they are the employee’s tax dependent.

Distributions

Similar to health FSAs and HRAs, HSA funds may only reimburse qualifying medical expenses of the HSA account holder and the account holder’s spouse and tax dependents on a tax-favored basis. Therefore, the expenses of domestic partners or their children are generally not reimbursable by the employee’s HSA, unless the employee is willing to pay the taxes and penalties applicable to ineligible withdrawals.

If the domestic partner opens their own HSA, they can use those HSA funds for their own and their child’s medical expenses but not the employee since the employee is not their tax dependent.

Cafeteria Plan Election Change Rules

Domestic partner premiums paid on after-tax basis are not subject to §125 election change rules, so the employee can therefore drop the domestic partner’s coverage at any time unless the employer or carrier implements rules restricting mid-year changes.

Domestic partner premiums paid pretax are subject to the same mid-year election change rules as all other pretax premium deductions.

HIPAA Special Enrollment Rights

If a domestic partner or their child loses other coverage, the loss of coverage triggers a HIPAA special enrollment event for the employee and the domestic partner or child losing coverage to enroll on the plan mid-year. Only the dependent losing coverage has a special enrollment right though – if the domestic partner’s child loses coverage, for example, the employee can enroll the child on the plan via special enrollment but the plan is not required to allow mid-year enrollment for the domestic partner who didn’t lose coverage.

Entering into a new domestic partnership is not a HIPAA special enrollment event that would require the plan to allow the employee to add the new domestic partner or their children to the plan outside of open enrollment. If the employee or domestic partner gives birth to or adopts a child, that would be a special enrollment event for the employee and the newly acquired child to enroll on the plan, but not the domestic partner or any other children. That being said, plans that extend coverage to domestic partners could choose to allow mid-year enrollment upon a newly formed domestic partnership or the birth or adoption of a child so long as it is written into the plan documents and agreed upon by the carrier (or stop-loss vendor).

COBRA and State Continuation

Under federal COBRA, only covered employees, spouses, and dependent children may be qualified beneficiaries, so a domestic partner will not be a qualified beneficiary with their own independent COBRA rights. However, if the employee elects COBRA, they will have the same right as an active employee to cover the domestic partner as a dependent on the plan. If the domestic partner was covered when the qualifying event occurred, or is added during open enrollment, the domestic partner may continue coverage as a dependent so long as the employee remains enrolled in COBRA but cannot continue the coverage on their own if the employee drops the COBRA coverage.

For fully-insured plans subject to state continuation requirements, in states which recognize domestic partnerships, the plan may be required to offer state continuation coverage to domestic partners in some cases (e.g., under CalCOBRA).

Medicare Secondary Payer

Normally, for an employer with 20+ employees (100+ in the case of disability-based Medicare), a group health plan would be the primary payer to Medicare for an active employee and their spouse enrolled on the group health plan. But because a domestic partner is not the employee’s spouse, Medicare would be the primary payer for the domestic partner, even if the employee is still actively working. That means Medicare will pay first if the domestic partner is enrolled in both Medicare and the group health plan. If the group health plan has a Medicare Estimation clause (i.e., group health plan pays secondary to Medicare whenever Medicare is primary, even if the participant does not actually enroll in Medicare), it would leave the domestic partner with very limited coverage if the domestic partner does not enroll in Medicare upon becoming eligible. In addition, because Medicare is primary over the group health plan for the domestic partner, group health plan coverage will not hold off the Medicare Part B late enrollment penalty the way it would for a spouse. If the domestic partner does not sign up for Medicare when first eligible, they may find themselves having to pay a permanent late enrollment penalty when they finally do enroll in Medicare Part B down the road.

 

Apex Benefits is not a law firm and cannot dispense legal advice. Anything contained in this communication is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.