Domestic Partner Benefits in the United States
A Discussion of Issues Related to Cost, Plan Design, and Administration
The rapid increase in U.S. households comprised of non-married couples, both same-sex and opposite-sex, has created a challenging environment for employers as they try to keep pace with the changing profile of the work force. This article presents the general issues surrounding a U.S. employer’s decision to offer employee benefits to the domestic partners of current employees.
Employers today have made great efforts to establish employee benefit policies that do not discriminate against current employees or applicants based on age, race, marital status, sexual orientation, disability, national origin, or religion. In the process of maintaining equality and equity in monetary and non-monetary benefits, employers have found it necessary to reconsider how indirect compensation is distributed to non-traditional households, for example, domestic partnerships. At the center of this issue is employers’ need to remain competitive in attracting and retaining qualified talent.
Defining “Domestic Partner”
It is important to note that there is no uniform definition of “domestic partner.” For benefits eligibility purposes, however, the definition of a domestic partner commonly includes the following elements:
- Minimum age requirement (usually 18 years);
- No relation by blood to employee (as defined by the relevant state marriage law);
- Shares exclusive relationship of some duration (e.g., one year) with employee;
- Financially interdependent; and
- Cohabitates with employee.
The employer may consider excluding cohabitation as a required element in its definition of domestic partner, as this is not a requirement for legally married couples. The objective is to define the non-married relationship so that it accommodates long-term, committed relationships between two people who either choose not to marry or cannot legally do so while excluding simple living arrangements, such as roommate situations.
State of the Union
Currently, 11 U.S. state governments have enacted or proposed legislation that recognizes domestic partnerships or civil union relationships.
Table 1: U.S. State Governments Recognizing Domestic Partnerships
In the absence of such statutes, many employers, both public and private, will rely on the definitions of marriage, spouse, dependent, and family used by the state in which the employer is domiciled. Additionally, the Defense of Marriage Act of 1996 (DOMA, §3) defines marriage as follows: “…the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.” DOMA definitions apply to all federal laws, thereby preventing domestic partners from being treated as spouses for income tax purposes.
DOMA does not prevent employers from offering benefits to domestic partners, but it does prevent employers from offering certain types of benefits to domestic partners who are not dependents of the employee, as defined by the U.S. Internal Revenue Code (IRC).
The U.S. Census reports that:
- From 1950 to 2000, U.S. households comprised of legally married couples declined from 78 percent to 52 percent.
- In 2000, 5.5 million households were comprised of unmarried couples:
- 89 percent of these were opposite-sex couples
- 11 percent were same-sex couples
- By 2006, the number of U.S. households comprised of legally married couples further decreased to 50 percent of the total.
Not surprisingly, the number of employers offering benefits to this emerging household demographic has increased significantly. In an attempt to define these non-married households, employers have begun referring to these couples as “domestic partners” or “spousal equivalents.” Table 2 illustrates the percentage change in employers offering benefits to domestic partners among small, medium, and large employers.
Table 2: Percentage of Employers Offering Domestic Partnership Benefits to Employees (1997 – 2008)
Further, according to prevalence data maintained by the Human Rights Campaign (HRC), a civil rights organization, the number of government-sector employers providing domestic partner benefits is also increasing.
Table 3: U.S. State Governments Offering Domestic Partnership Benefits to Employees (2009)
Employers that offer domestic partner benefits do not necessarily offer all of the potential benefits to domestic partners. An employer may decide to offer only medical benefits or non-health benefits, such as life insurance, tuition reimbursement, relocation assistance, discount programs, and transportation. While employers currently have no legislative obligation to offer domestic partner benefits, a partial offering, that is, one that excludes non-health benefits from the benefits package, may generate employee relations issues, such as the filing of grievances among union populations.
Certification of a Domestic Partner Relationship
Employers usually require domestic partnerships to be formally registered in order for benefits to be offered. U.S. state or local law frequently accommodates the registration and/or certification of a domestic partner relationship. In locales where this process is not available, the employer may use its own certification process, which could include a notarized domestic partnership affidavit or evidence of a financial relationship, such as a joint lease agreement or home mortgage documents. Employers should ensure that the process for enrolling a domestic partner in benefits parallels that for enrolling a spouse so as not to inadvertently create a discriminatory circumstance.
Tax Treatment of Domestic Partner Benefits
If a domestic partner qualifies as a dependent under the U.S. tax code, employer-provided benefits are not taxed and the benefits received under the plan will also be tax-free. To qualify as an employee’s dependent under the U.S. Internal Revenue Code for tax purposes, the domestic partner must be a “qualifying relative,” or dependent and the following criteria must be met:
- Employee must provide more than 50 percent of partner’s support;
- Partner must be member of employee’s household; and
- Partner’s residence must be same as employee’s.
The employee may also make his or her contribution toward coverage on a pre-tax basis. If the domestic partner does not meet the definition of a dependent, then the fair market value of employer-provided benefits for the domestic partner, less any contributions made by the employee, becomes imputed income for the employee and must be reported on his or her IRC Form W-2. The fair market value of the benefits is typically the employer’s COBRA rate for health insurance minus the 2 percent administration fee. COBRA stands for the Consolidated Omnibus Budget Reconciliation Act of 1985. The Act provides for the continued insurance coverage for an employee under his or her employer’s plan even after he or she is no longer employed there. The employee pays the same rate as before, minus any employer subsidy.
The employer and the employee may also be responsible for a FICA (Federal Insurance Contributions Act) tax increase of 7.65 percent and a FUTA (Federal Unemployment Tax Act) tax for the first $7,000 of employee compensation, plus any applicable state taxes resulting from the increase in the imputed income given to the employee.
Employee A earns $45,000 annually and is in the 28 percent federal income tax bracket. A’s employer makes a non-taxable contribution toward A’s health coverage, as well as a taxable $3,500 contribution for B, A’s domestic partner, in the form of coverage. A must include the $3,500 as (imputed) income at a tax cost of $980. He also must pay social security taxes of $267.75 (6.2 percent of the total goes towards OASDI (Old-Age, Survivors, and Disability Insurance and 1.45 percent towards Hospital Insurance).
The following tax and legislative issues should also be taken into consideration:
- U.S. federal law only allows spouses and dependents, as defined by DOMA, to participate in plans that provide pre-tax contributions toward coverage and to receive qualified healthcare reimbursements. The same circumstances also apply to health reimbursement accounts.
- As stated above, COBRA provides for the continuation of insurance coverage due to a loss of employment. To be eligible for COBRA benefits, the individual losing coverage must be a “qualified beneficiary.” Under COBRA, a qualified beneficiary is an employee, spouse, or qualifying dependent child. Because a domestic partner cannot be a dependent child of the employee under COBRA, the domestic partner is not eligible for COBRA, even if he or she qualifies as a dependent under the U.S. Internal Revenue Code.
- The U.S. Health Insurance Portability and Accountability Act (HIPAA) includes a requirement that medical insurance plans must provide special enrollment periods to add a spouse or dependent(s) in the event of marriage or birth. The definition of “spouse” and “dependent” outlined in DOMA and the U.S. tax code apply here as well. Therefore, there is no statutory obligation for the employer to accommodate a special enrollment period under HIPAA.
- The Family Medical Leave Act (FMLA) allows eligible employees to take up to 12 work weeks off during a 12-month period for the birth or adoption of a child, to care for a family member, or if the employee has a serious health condition. FMLA prohibits the recognition of marriage between two persons of the same sex for all federal purposes and so, employers that provide domestic partner benefits are not required to offer a leave of absence under FMLA for the care of a domestic partner.
The above descriptions pertain to the mandatory coverage employers must offer under each of these laws. Employers that offer domestic partner benefits may amend the applicable plan documents to accommodate COBRA-like and/or HIPAA-like benefits and a leave of absence on the same basis as FMLA, in the interest of benefit equity and consistency in benefit administration.
Among the issues associated with extending benefits to domestic partners, the cost impact on the benefits budget is of paramount concern to employers. The potential for abuse (e.g., covering ineligible partners) and the perceived potential for catastrophic lifestyle-related morbidities (primarily HIV/AIDS) are key drivers of this concern. However, a 2005 Hewitt Associates study indicated that 64 percent of employers that offer domestic partner benefits realized a less than 1 percent increase in their total benefits costs, while only 5 percent incurred costs related to domestic partnerships that exceeded 5 percent of their total benefits costs.
In general, the costs associated with offering domestic partner benefits represent a 0.02 to 2 percent increase in medical plan costs, depending on the eligibility definition (e.g., same-sex partners only, opposite-sex partners only, or both same-sex and opposite-sex partners and any dependents). The reasons for the relatively low increase in medical plan costs include low enrollment in domestic partner benefits program due to privacy concerns and the availability of benefits through the domestic partner’s employer. National enrollment rates for domestic partners are approximately 1 to 2.5 percent. Both enrollment and costs do increase, however, when benefits are made available to opposite-sex domestic partners and dependents.
In addition to the increased benefits cost, there may be an increase in the costs associated with administering domestic partner benefits, for example, dissemination benefits information and programming changes to the associated human resource systems. At the present time, there are no data available from which a benchmark for the costs associated with increased administration requirements can be estimated.
Implementation Decision Points
- Define “domestic partner” for eligibility purposes, that is, same-sex partners only, opposite partners only, or both same-sex and opposite-sex partners.
- List the benefits that will be offered.
- Identify other benefits that may be impacted by adding domestic partners as an eligible class (e.g., pension, life, survivor income, beneficiary designations).
- Modify the human resources benefit system as necessary.
- Update employee benefits communication materials. All materials should clearly indicate that it is the employee’s responsibility to inform the employer when a domestic partnership is terminated, resulting in the partner’s ineligibility for further coverage.
- Ensure that the process of enrolling a domestic partner in the benefits program mirrors that for legally married couples.
Indirect compensation (e.g., employee benefits) can account for 35 percent or more of the employee’s total compensation package. Public and private sector employers are quickly recognizing that to remain competitive in attracting and retaining top talent, they must meet the demands of the work force, given its evolving profile, this means accommodating specific demographics, such as older workers (for whom marriage may not make sense because of children and inheritance issues) and workers with non-traditional relationships. This dynamic is forcing employers to address these issues in part by modifying benefits eligibility rules to include new employee classes. Doing so assists the employer by mitigating the benefits package as a decision point for current and future employees.
The available data suggest that the once-feared high cost of extending benefits to domestic partners has not been realized by employers that have made the decision to offer these benefits. There are, however, additional administrative considerations to address, given that the current federal legislation governing employee benefits does not provide for non-legally married spouses in its definitions. This requires the employer to consider the definitions that are used, the documentation requirements, and the related communications materials to avoid creating a discriminatory benefits environment.
 Sally Doubet King and Marc E. Purintun, “Benefits Issues for Domestic Partners,” McGuireWoods, LLP, March 2006.
 The Human Rights Campaign, Domestic Partner Benefits: Prevalence Among Private Employers, February 12, 2009, http://www.hrc.org/issues/workplace/benefits/11612.htm. (no longer accessible).
 Under IRC §105 and §106.
 IRC §152(a).
 As defined by IRC §152(d)(1).
 As defined by IRC §213(d)
 Equality Maryland, Benefit Programs for Domestic Partners & Same-Sex Spouses, Hewitt Associates, Lincolnshire, IL: July 2005.
 Domestic Survey Findings: Domestic Partner Benefits, Hewitt Associates, Lincolnshire, IL: 2000.
About the Author(s)
James Schaefer, MBA, is a graduate of the Graziadio School of Business and Management (EMBA16). He has 25 years of consulting experience and is currently the National Health Care Practice Leader for a consulting and actuarial firm located in Dallas, Texas. He specializes in issues related to the delivery of employer-sponsored health and welfare employee benefits, with a focus on strategic planning. He has provided advisory services to clients ranging from 500 to 750,000 employees and is a frequent speaker to industry organizations.