Pitfalls await employers adopting partner benefits - Articles - Employee Benefit News

Employee Benefit News

By Kathleen Koster
June 15, 2009
Employers avowing equal benefits for same-sex couples and their families should tread carefully down the aisle in order to sidestep potential tax and legal snags, experts advise.
The concerns might be fewer for self-insured employers generally bound only by federal statutes that do not automatically apply to domestic partners, but all benefit sponsors would do well to stay apprised of related legislative developments in states where they conduct business, where their employees live, and where their insurance provider is based. …
Employers offering benefits for domestic partners must ensure taxation and imputed income issues are handled properly, that plan documents and employee communications reflect the benefit, and have administrative procedures in place for enrollment, certification and termination of coverage, advises Carol Tavella, senior manager of compensation and benefits at SMART Business Advisory & Consulting.
"We would advise any employer considering offering benefits to domestic partners to check with their insurers, including the stop-loss carriers, because technically they're creating a new eligible class of individuals that is atypical," Tavella explains. …

Tax considerations

If employers operate in states that require them to provide equal benefits, or they voluntarily choose to expand their definitions of spouse and dependent, they must address the tax implications of changing their plans — the most pressing issue when making the switch, experts say.
Because the same-sex spouse or partner of an employee is not considered a spouse for federal tax purposes under the Defense of Marriage Act, employers must withhold taxes from the employee based on the fair market value of the coverage for the domestic partner and their dependents unless the domestic partner or his or her dependents are dependents of the employee under federal tax law. …
"Unless you have a true tax dependent, the coverage of the domestic partner is going to be taxable income to the employee. Also, the domestic partner can't be covered under a flex spending account," explains [Susan Stoffer, a partner in the employee benefits and executive compensation practice of Seyfarth Shaw LLP]. …
Other offerings to consider besides health benefits that are important to domestic partners are the Family and Medical Leave Act, bereavement leave, relocation and travel assistance, education and tuition assistance, adoption assistance, credit union membership, disability and life insurance, and employee discounts.

Retirement plan considerations

For 2010, the Pension Protection Act provides nonspousal beneficiaries the same rollover rights that spousal beneficiaries have.
Until then, businesses must study applicable state laws to figure out whether the domestic partner will be recognized as the de facto beneficiary or whether the company must amend their plan documents and/or beneficiary election forms to have them recognized as such, explains Stoffer. …
Most employers offering domestic partner benefits require some sort of substantiation of the relationship, such as an affidavit signed by the employee. Affidavits generally state that the partners are not related, they are both mentally competent, that they live together and that they have not been in any other domestic partnership in at least the past six months.
Many employers also require additional substantiation of the "financial interdependence, such as a joint bank account, a joint lease, joint mortgage or joint car ownership," says Tavella. …

Preparing plan documents

In preparation for all the above modifications, employers should create enrollment forms and develop attestations forms and procedures, says Stoffer.
These documents should be rewritten to redefine the company's definition of a spouse and a dependent, as more often than not employers will include coverage for dependents of domestic partners. …
If employers decide to expand their definition of spouse to include same-sex spouses as well as domestic partners, this should be reflected in all aspects of the company, including work events.
Communicating these changes is imperative if the employer wants to be sure that affected employees are using the benefit correctly and that other workers fully appreciate the equalized workspace the employer is attempting to foster.