Workforce.com

Make Your Company's Domestic-partner Benefits Foolproof

February 1, 1998
They can bring boycotts, angry phone calls and threatening crowds. But they can also bring greater loyalty, appreciation and employee support. Domestic-partner benefits can be controversial, but, as companies such as Levi Strauss, Xerox, IBM and Bank of America can testify, they can be worth the controversy. Nationwide, more than 40 city and state governments offer domestic-partner benefits. James Baker, an attorney shareholder with San Francisco-based employment law firm Littler, Mendelson, Fastiff, Tichy & Mathiason, offers advice to human resources professionals whose companies are considering a domestic-partner plan.

Has there been an increase in the number of organizations offering domestic-partner benefits to employees?
It's a growing trend being led by entertainment and technology companies primarily and the West Coast in general 1/4 Thirty-nine out of the top 100 businesses in [San Francisco] offer domestic-partner health-insurance benefits. And these are huge companies: Chevron, Bank of America, Hewlett-Packard. I think certainly there's a trend among local governments and colleges, and universities, as well, to provide these benefits. News articles appear on a weekly basis showing that there are new governments providing the benefits, and already more than 130 colleges provide domestic-partner benefits.

Domestic-partner benefits are an advantage for an employer to attract and retain employees in a tight job market.

Might these benefits be the next level of competitive advantage among employers?
They're an advantage for an employer to attract and retain new employees in a tight job market. They reinforce companies' policies of nondiscrimination-their companies' deeds are matching their words: They're paying to provide these domestic-partner benefits.

What are the biggest problems with offering these benefits?
The biggest problem is that federal law wasn't drafted to accommodate the coverage of domestic partners. In fact the federal government seems to be moving in the opposite direction. Just last year Congress passed The Defense of Marriage Act that states for purposes of federal law, the word "marriage" means only the legal union between a man and a woman as husband and wife. The word "spouse" refers only to a person of the opposite sex who is a husband or wife.

In what areas does this cause the most problems?
The big problems really hit home with retirement-plan benefits, because the tax code doesn't recognize domestic partners as qualified beneficiaries. A qualified retirement plan is only permitted to pay benefits to qualified beneficiaries. So, theoretically, providing retirement-plan benefits to someone who isn't a qualified beneficiary could disqualify a retirement plan.

That sounds risky. Are any companies providing such benefits?
I don't know of a single private company that's offering domestic-partner benefits in its retirement plan. The only entities I'm aware of that do offer retirement-plan benefits to domestic partners are the City and County of San Francisco.

Some people say domestic-partner benefits insulate a company from sexual-orientation discrimination claims-is that true?
It's always a facts-and-circumstances test as to whether an employer is guilty of sexual-orientation discrimination. But I think a domestic-partner program will be an important defensive tool for an employer because it's more than just a policy statement on a piece of paper that says, "We don't discriminate." These are deeds by an employer. The employer is paying every month in support of its policy to provide benefits to employees in same-sex relationships, so I think it certainly helps. One of the claims by [plaintiffs] in this type of case is that they work in an office that has a hostile environment. One piece of evidence to show that the company doesn't condone [such an environment] is this benefit.

The value of the premium the employer provides to an employee to cover the domestic-partner benefit is taxable

Are anti-discrimination laws starting to come into play in deciding domestic-partner benefits?
Yes. Ten states and the District of Columbia currently have state statutes that bar employment discrimination based on sexual orientation.

There also have been a couple of interesting but unsuccessful lawsuits based on [the connection between anti-discrimination policies and providing domestic-partner benefits]. The first was brought in California in 1985 and was called Hinman v. the Department of Personnel Administration. Hinman sued the state of California to compel it to provide dental benefits to his domestic partner. The California court said the state of California isn't discriminating against same-sex couples because it treats heterosexual state employees the same.

What were the circumstances of the second case?
Several professors at New Brunswick, New Jersey-based Rutgers University sued the university under the theory that because the college has a policy against sexual-orientation discrimination, domestic partners should receive health benefits. The New Jersey Court of Appeals [ruled] the state didn't have to provide domestic-partner benefits.

Have there been any opposite rulings?
Alaska has come to the opposite conclusion. There's a 1997 Alaskan Supreme Court decision called University of Alaska v. Tumeo. It held that unmarried employees of the state university were entitled to health-insurance benefits for their domestic partners.

So what do the opposing rulings mean for corporations?
Now there's a split of opinion as to whether [plaintiffs] can use sexual-orientation discrimination laws as a basis for compelling a state to provide domestic-partner benefits.

What are other potential legal problems?
The Internal Revenue Service has issued some private letter rulings discussing what happens when an employer provides health-insurance coverage to an employee's domestic partner. In a nutshell: The IRS has said these are taxable benefits to the employee. So the value of the insurance premium the employer provides to the employee to cover his or her domestic partner becomes taxable income to the employee.

Is there any way to avoid this?
There's a way around it, and that would be to see if the domestic partner would qualify as a dependent for federal income-tax purposes. Section 152 of the tax code describes who is a qualified dependent for income-tax purposes. [The people] obviously have to live together for the whole tax year-January 1 through December 31. To be a dependent, the person has to receive more than half of his or her support from the employee. If a partner meets those two requirements, then it's the best of all worlds for the employee and the employer. It's not a taxable event for the employee, and the employer gets to treat the expense as a pretax contribution to a health-insurance program.

What is the legal definition of domestic partner?
The partners can't be blood relatives, obviously. And there's always a requirement that these two people share the same residence and intend to do so indefinitely. Another is for them not to be currently married to somebody else. One big criterion that virtually all employers require those requesting domestic-partner benefits to meet is for the domestic partners to state that they will be jointly responsible for each other's welfare and financial obligations. Another requirement is that the two people are each others' only domestic partner. There are also about 40 city governments, local governments, that have registries for which people can go down to city hall and become an official registered domestic partner.

What effect will the recent Health Insurance Portability and Accountability Act (HIPPA) have on a domestic-partner benefit plan?
It might well work out that the earlier cost estimates for providing domestic-partner benefits were too low because of HIPPA. A lot of plans prior to this year had fairly tough pre-existing condition exclusions, so even though [plans] said they provided domestic-partner benefits, they didn't cover anybody's serious medical illness. They were excluding somebody who was sick for a year, two years, three years, or some said forever. The early cost studies showed that the increases were between 1 percent and 3 percent for an employer to offer domestic-partner benefits. So they might have been overly optimistic.

Any other legal areas we haven't touched on?
The Family and Medical Leave Act (FMLA) [presents some legal challenges]. A lot of the employers' plans that offer domestic-partner benefits also permit FMLA leaves for people to take care of domestic partners who are seriously ill. The good old U.S. Department of Labor has made it clear that while it's fine for an employer to provide these equivalent FMLA leaves for these purposes, they don't count under FMLA. So employers ought to be aware.

Workforce, February 1998, Vol. 77, No. 2, pp. 95-96.