A recent court decision by the Massachusetts Supreme Judicial Court and a new statute enacted by the State of California have created challenges for employers that offer group health plan benefits. Employers should consider the impact that these developments will have on the design and the ongoing administration of their health plans.
Massachusetts Ruling on Same-Sex Marriage
In Goodridge v. Department of Public Health, seven same-sex couples were denied marriage licenses because the Commonwealth of Massachusetts does not allow persons of the same sex to marry. These couples sued, alleging that the denial of a marriage license solely because they were same-sex couples violated their rights under the Massachusetts Constitution. In reviewing these actions, the Massachusetts Supreme Judicial Court held that the Massachusetts Constitution barred the Commonwealth from denying an individual the “protections, benefits and obligations of civil marriage” solely because the person desires to marry a person of the same sex. Effectively, the Court held that same-sex marriage was permissible under the Massachusetts Constitution. Because of the significance of this decision, the Court stayed entry of judgment for 180 days (until May 6, 2004) in order to give the Massachusetts legislature the opportunity to enact legislation to address this matter.
If it chooses to act, the Massachusetts legislature may take a number of approaches. First, the legislature may enact legislation that conforms to the Court’s decision that specifically authorizes same-sex marriages under Massachusetts General Laws. Alternatively, the legislature may enact a domestic partner law, similar to Vermont’s civil union law. The legislature may take steps to amend the Massachusetts Constitution to ban same-sex marriages. Although Massachusetts Governor Mitt Romney recently stated his intention to seek a Massachusetts constitutional amendment prohibiting same-sex marriage, it is more likely that Massachusetts will permit same-sex marriages or adopt some type of civil union statute.
If Massachusetts permits same-sex marriages, employers who provide health benefits to Massachusetts employees or to employees who are legally married to a member of the same sex under Massachusetts law will need to review their health plans to determine how a “spouse” is defined under the plan. A typical employer-sponsored group health plan provides coverage to a covered employee’s spouse, who is defined as someone who is legally married to the covered employee under state law. Because same-sex couples would be married legally under Massachusetts law, a same-sex spouse of a covered employee would be entitled to benefits under a plan that includes this definition of a spouse.
This issue also affects employers who are not based in Massachusetts, but who hire an employee who was married legally to a same-sex partner under Massachusetts law. Generally, states recognize legally valid marriages in other states due to the Full Faith and Credit clause of the U.S. Constitution. However, under the Federal Defense of Marriage Act, states are not required to recognize a same-sex marriage in another state. In addition, 37 states have adopted laws that prohibit the state from recognizing any marriage other than one between a man and woman. Same-sex domestic partners in those states would not be legally married under local law and, unless a plan otherwise provided coverage to same-sex domestic partners, these individuals would not be entitled to group health plan benefits.
If Massachusetts adopts a law recognizing civil unions or creating a similar legal status, employers would be faced with similar, though somewhat less complicated, issues. A health plan that provides coverage to a covered employee’s “spouse” would typically not be required to provide coverage to the employee’s civil union partner. A number of court cases resulting from Vermont’s civil union statute held that other states are not required to recognize Vermont civil unions because a civil union is not treated as a marriage. It is likely that courts interpreting a similar Massachusetts statute would reach the same conclusions. However, a civil union partner could be eligible for coverage as a dependent of a covered employee, depending on the health plan’s definition of dependent.
Regardless of which approach Massachusetts follows, employers will be required to review their plans’ eligibility criteria and defined terms to determine how same-sex spouses or partners in a civil union are treated under the terms of the plan.
In addition, employers should bear in mind that, for federal law purposes, same-sex domestic partners are not recognized as spouses, regardless of which approach is adopted by a state. This means that tax-favored benefits (like pre-tax cafeteria plan or flexible spending account benefits) cannot be provided to employees who add non-tax code dependent domestic partners to group health plan coverage. Employers that wish to provide for domestic partner benefits need to consider the income tax implications to employees of providing these benefits.
California’s Equal Benefits in Contracting Law
On October 12, 2003, then-California Governor Gray Davis signed a law requiring state contractors to provide benefits to registered domestic partners on the same basis as the contractors provide benefits to legally recognized spouses. The Equal Benefits in State Contracting Act, which is effective for contracts executed or amended on or after January 1, 2007, is significantly more far-reaching than the domestic partner legislation adopted in San Francisco, Los Angeles, Seattle and other localities, upon which it was based. Experts estimate that the law, which applies to companies that enter into contracts with the State of California (or state agencies) worth more than $100,000 will affect nearly 22,000 companies.
Under the new law, each affected company would have to offer comparable domestic partner benefits to all of their employees who provide goods and services that relate to the employer’s contract with California, regardless of whether the employees work in California. For example, an Illinois-based company that enters into a contract with California must offer domestic partner benefits to its Illinois employees who service that contract on the same basis as it offers benefits to spouses of employees. Unless the employer extends domestic partner benefits to all employees, this would create a dual benefit structure with attendant administrative burdens, as the employer would be providing domestic partner benefits only to employees who service the California contract.
Challenges to California Law Implementation
There are a number of challenges that may prevent the law from becoming effective on January 1, 2007. New California Governor Arnold Schwarzenegger has stated his opposition to the law. Also, California citizens have commenced a referendum petition to repeal the law and several interest groups have announced their intention to challenge the law in court. Thus, it is currently unclear whether the statue will remain “on the books” until its effective date.
If the law becomes effective, then it is possible that ERISA would preempt its application to private employer-sponsored ERISA-covered benefit plans, such as health plans and retirement plans. ERISA would not preempt the law as it applies to non-ERISA benefits, including bereavement leave, moving expense benefits, educational and tuition assistance and certain other fringe benefits. Thus, if the new law becomes effective, an employer seeking to continue its contracts with California may have to add certain domestic partner benefits, either for all of its employees or only for employees who service the California contract.
Steps for Employers to Consider Now
Employers should begin now to review these new developments and consider reevaluating their current policy on domestic partner benefits. As part of this reevaluation, employers should consider the following additional pieces of information:
Nationwide Trend: Through a number of court decisions and statutory changes, many states are providing greater protections for domestic partners. Similarly, the number of companies that offer benefits to domestic partners consistently increases each year.
Industry Practice: Many employers offer domestic partner benefits because they view these benefits as necessary to remain competitive in recruiting and in retaining valuable employees.
Customer Impact: Offering domestic partner benefits may improve public relations, depending on an employer’s industry and customer base.
Cost: Domestic partner health coverage may not cost that much. Studies in the late 1990s found that offering same-sex domestic partner health benefits increased an employer’s health plan costs by an average of one-half of one percent, largely due to low domestic partner enrollment.
Tax Issues: An employee whose non-tax code dependent domestic partner receives health coverage under an employer’s group health plan will be taxed on the value of that coverage for federal income tax purposes. Although most states would also tax the employee for this coverage in the same manner as federal law, a few states exempt from tax the value of coverage provided to a domestic partner.