The Impact of the New Hampshire Civil Union Law on Employee Benefits

John E. Rich, Jr.
Director & Chair, Tax Department
May 1, 2007

On January 1, 2008 New Hampshire will be the fourth state to recognize civil unions, along with Vermont, Connecticut and New Jersey. House Bill 437 provides that parties who enter into civil unions “shall be entitled to all the rights” provided for in state law that apply to married couples. Although the House Bill 437 does not specifically refer to benefits as do the Vermont and Connecticut laws, presumably the New Hampshire Legislature intended employees in civil unions to be entitled to the same employer-provided benefits as married employees.

Notwithstanding the Legislature’s intent, because federal law governs employer-provided benefits, employers should not assume that after the January 1, 2008 effective date, employees in civil unions will be entitled to the same benefits as married employees. Instead, employers will need to analyze each benefit to determine how the law will apply. In cases where civil union benefits are optional, employers will need to determine whether to offer the benefit and amend their plans and policies accordingly.

Federal Laws that Govern Benefit Plans

Employer benefits are governed primarily by a federal law known as the Employee Retirement Income Security act of 1974 (“ERISA”) which was enacted in part, to provide for uniform benefit laws across the country. As a result of the passage of ERISA, an employer with employees in several states no longer had to have a different benefit plan in each state to comply with different state laws. ERISA provides for this uniformity by specifically superseding or “preempting” any state law or regulation that relates to an employee benefit plan. ERISA governs retirement plans such as 401(k)s, pension plans and welfare plans such as medical, dental, long-term disability and death benefit plans. ERISA does not apply to governmental plans such as the New Hampshire Retirement System. Because states had traditionally regulated insurance, ERISA also includes a provision saving state insurance laws from preemption.

The second relevant federal law is the Defense of Marriage Act (“DOMA”). DOMA defines marriage as between one man and one woman for purposes of federal law. Thus, when the terms “marriage” or “spouse” are used in ERISA, the Tax Code or any other federal statute, DOMA prohibits the recognition of civil unions or same-sex marriages. As a result, civil unions are not recognized for tax purposes.

What Rights and Benefits Are Employers Required to Give to Those in Civil Unions?

As discussed above, although ERISA preempts state laws that relate to benefits, laws relating to insurance are not preempted. As a result, to the extent that any New Hampshire state insurance law or regulation requires employers to offer coverage for domestic partners, that law or regulation would not be preempted. It is expected that the New Hampshire Insurance Department will rule that if an employer offers medical insurance coverage for married employees, the civil union law requires the employer to offer similar coverage to those in a civil union.

Employers that provide self-insured medical, dental and other benefits to employees are not subject to the same state insurance laws because of ERISA preemption. Therefore, employers who self-insure will not be obligated to (although they could on a voluntary basis) provide the same coverage to employees in civil unions as they do to married employees. An employer providing benefits on a self-insured basis needs to clearly address this coverage issue in all plan documents, benefit descriptions and employee communication materials.

Because of ERISA preemption and the DOMA, domestic partners will not be entitled to the same rights and benefits under private employer retirement plans as spouses of employees. Unless an employer voluntarily adds an additional benefit, domestic partners will not receive death benefits from traditional pension plans in the event of the employee’s death prior to retirement. Most pension plans will however, allow an employee at retirement to elect a joint annuity that will pay benefits to the domestic partner after the employee’s death. In the case of a 401(k) or profit sharing plan, the domestic partner will have to be specifically named as the employee’s beneficiary in order to receive any death benefit. Spousal consent rules for loans and benefit elections will not apply to domestic partners. Lastly, the employee’s benefits cannot be split between the employee and the domestic partner when a civil union is dissolved. Employers will need to carefully review and revise their retirement plan documents and plan descriptions to reflect how they want the civil union law to apply to their plans.

How are Leaves Impacted?

Employers with 50 or more employees are required by the federal Family Medical Leave Act (“FMLA”) to provide unpaid leave to an employee to care for the employee’s spouse. Because a domestic partner is not a spouse for federal purposes, FMLA leave is not required in that situation. Employers intending to voluntarily provide FMLA leave in such a case will need to revise their policies. Employers not subject to FMLA that voluntarily offer leave benefits are likely to be required to treat domestic partners the same as spouses because of the civil union law.

Potentially further complicating the situation is a pending case at the New Hampshire Supreme Court involving a challenge under the New Hampshire state anti-discrimination law to the State of New Hampshire’s denial of health, dental and bereavement leave benefits to domestic partners of two State employees. Because governmental benefits are at issue, ERISA preemption, and the DOMA are not involved. In light of ERISA and DOMA not being part of the court’s analysis, private employers need to keep in mind that any opinion issued by the Supreme Court ruling that the State’s failure to provide benefits to employees and their domestic partners is discriminatory is not the last word on this issue. However, to the extent that certain employee benefits are not covered by ERISA such as bereavement and paid sick leave, the decision by the Supreme Court will be binding.

Tax Treatment of Group Health Benefits

Employers providing group health benefits to domestic partners will need to make changes to their payroll and tax reporting systems. Because domestic partner benefits have been voluntarily offered for some time, the IRS has issued guidance. First, the IRS has ruled that providing group health benefits to domestic partners does not affect the tax status of other participants in the plan. However, employees in civil unions will not be entitled to the same favorable tax treatment with respect to employer-provided health coverage as married employees. If the civil union partner can qualify as a dependent of the employee, favorable tax benefits will be available in certain circumstances. To qualify as a dependent, at least half the partner’s support must be provided by the employee, the couple must live together and the partner’s income cannot exceed $2,000. Employers will need to receive verification from the employee as to the partner’s dependent status.

If the domestic partner cannot qualify as a dependent, the employee must include in gross income the fair market value of the group medical coverage provided by the employer less the amount paid by the employee for that coverage. The amount included as wages is subject to employer withholding and employment taxes. There are similar imputed income rules for group life insurance and other benefits. In addition, non-dependent domestic partner benefits may not be provided through a cafeteria or Section 125 plan. Furthermore, a civil union will not qualify as an event allowing a change in a cafeteria plan election. Thus, employers with January 1st plan years will need to inform employees of the implications of a benefit election for the 2008 year.

Employers that provide health insurance through high-deductible insurance plans linked with health savings accounts need to be aware that any amount paid from an HSA to cover medical expenses of a non-dependent domestic partner would be included in the gross income of the employee and would be subject to an additional 10% excise tax.

Health Care Continuation

The federal COBRA law requires employers with 20 or more employees to offer health care continuation coverage for certain qualifying events. Domestic partners are not entitled to continuation coverage under COBRA. Employers can provide it with concurrence of their service providers. New Hampshire insurance law imposes similar continuation coverage requirements for group health insurance. As a result, employers providing medical and dental insurance on a fully insured basis (regardless of number of employees) are likely to be required to offer continuation coverage to domestic partners that suffer a qualifying event. Employers providing medical and dental insurance on a self-insured basis would not be required to provide continuation but could do so if they desired.

In summary, New Hampshire employers faced with already complex benefits and tax laws will be confronted with a new level of complexity on January 1, 2008 when the civil union law becomes effective. In some cases, employers will have choices to make as to whether to provide coverage for domestic partners. Regardless of an employer’s views on the wisdom or necessity to provide these benefits, all benefits offered will need to be examined to determine how the civil union law impact the operation of the benefit plans and the tax treatment to employees and the employer.