February 2000


Domestic Partner Benefits

What is a “domestic partnership” and what proof of the relationship is required?

  • Domestic partner benefits are benefits that an employer voluntarily chooses to offer to an employee's unmarried partner, whether of the same or opposite sex.
  • An employer wishing to implement a domestic partner program needs first to identify what constitutes a domestic partner. The most common definitions include four or five core elements: 1) the partners must have attained a minimum age, usually 18; 2) neither person is related by blood closer than permitted by state law for marriage; 3) the partners must share a committed relationship; 4) the relationship must be exclusive; 5) the partners must be financially interdependent.
  • An employer also must decide whether the domestic partner program is to cover same-sex couples only or include opposite-sex couples.
  • Documentation of proof of a domestic partner relationship can take many forms. It is up to the employer to determine what is appropriate. Some employers are satisfied with a requirement that the partners sign a written statement of their relationship. Some employers may require proof of some financial relationship, such as a joint lease or mortgage or copies of tax returns showing financial interdependence. Whatever documentation is required must be germane to the issue of validating a domestic partnership, or it could lead to claims of invasion of privacy.

What is included in domestic partner benefits, and how many employers offer these benefits?

  • Most employers that offer domestic partner benefits offer a range of low-cost benefits, such as family/bereavement/sick leave, relocation benefits, access to employer facilities, and attendance at employer functions. However, most public attention focusing on domestic partner benefits involves employers that offer health insurance coverage to domestic partners.
  • According to a 1999 survey by the Kaiser Family Foundation and Health Research and Educational Trust, 18 percent of American workers were employed in firms that offered coverage for domestic partners; 11 percent were in firms that offered domestic partner coverage to same-sex couples; and 12 percent were in firms that offered coverage to unmarried heterosexual couples.
  • The Human Rights Campaign Fund, which describes itself as the largest national lesbian and gay political organization in the United States, had identified 2,856 employers that offered domestic partner benefits as of Aug. 6, 1999. A listing of firms that offer full health insurance coverage to domestic partners is posted by the Human Rights Campaign at the following web site: www.hrc.org/issues/workplac/dp/dplist.html

Why an employer offers domestic partner benefits:

  • Fairness--Many employers believe that a policy of offering benefits to legally married partners of employees and not offering the same benefits to the partners of non legally married partners of employees discriminates on the basis of sexual orientation and/or marital status. Many employers have a formal policy against discrimination on the basis of sexual orientation. The decision to offer domestic partner benefits communicates to employees that the employer is committed to its stated policy.
  • Market competition and diversity--The attraction to employees of a comprehensive benefits package that offers health and retirement coverage is well documented. In today's tight labor market, designing a benefits package that appeals to a diverse work force enables an employer to maintain a recruitment edge and communicates to employees that the employer values a diverse work force. Employee morale and productivity have been found to improve in work environments where individuals believe the employer demonstrates that it values its employees.

Costs of domestic partner benefits:

  • Cost is the primary concern for employers, especially with regard to health benefits, since extending coverage to more individuals increases the cost of health benefits. Two considerations drive the cost issue: 1) how many new enrollees the plan can expect to receive; and 2) what risks are likely to be associated with those individuals.
  • Hewitt Associates, in a 1994 study of domestic partner benefits, found that only 2 percent to 3 percent or less of all employees offered domestic partner coverage in the health plan actually elected to take it. Many employers, in the planning stage, had anticipated an enrollment rate of 10 percent. Employers that allow only same-sex couples to enroll domestic partners in the health plan report a lower enrollment rate than employers that allow opposite-sex couples to enroll. Overall, the 1994 Hewitt study found that 67 percent of the couples electing domestic partner coverage were opposite-sex couples.
  • Hewitt found, in 1994, that employers are no more at risk when adding domestic partners to their benefits plan than when adding spouses. Experience has shown the costs of domestic partner coverage to be lower than anticipated, and there are several reasons why: The employees eligible for domestic partner coverage tend to be young, and, as a result, healthier; enrollment in domestic partner coverage is low, primarily due to the fact that most domestic partners already have coverage through their own employers; any increased risk of AIDS among male same-sex couples appears to be offset by a decreased risk among female same-sex couples; and same-sex domestic partners have a near-zero risk of pregnancy.
  • Most recent estimates (1996) of the lifetime costs of treating a person with HIV disease range from $71,143 to $424,763. By comparison, the cost of a kidney transplant can be as high as $200,000, and the cost of premature infant care can run from $50,000 to $100,000.

Tax treatment/qualification for benefit privileges/recent actions:

Tax Treatment

  • The Internal Revenue Service (IRS) has addressed the issue of domestic partner coverage in several private letter rulings. According to those rulings, employment-based health benefits for domestic partners or nonspouse cohabitants are excludable from taxable income only if the recipients are legal spouses or legal dependents. The IRS also states that the relationship must not violate local laws in order to qualify for tax-favored treatment.
  • The IRS leaves the determination of marital status to state law. Currently, no state recognizes same-sex marriages. Some cities (i.e., San Francisco and New York City) allow domestic partners to register their relationship with the city, but these registries do not provide legal status as marriage or common-law marriage. With regard to opposite-sex couples, there are 13 states that recognize common-law marriagesa and 16 statesb that recognize common-law marriages contracted in other states, even though they do not recognize those that are contracted in their own states. Opposite-sex couples in those jurisdictions who apply for a common-law marriage do receive the tax-favored treatment for domestic partner coverage in an employment-based plan.
  • For those who do not qualify for tax-favored treatment, the tax on the benefits is determined by assessing a fair market value for covering the domestic partner. This amount is then reported on the employee's W-2 form and is subjected to Social Security, FICA, and federal withholding taxes.

Sec. 125 Flexible Benefits and Spending Accounts

  • Employee flexible allowances that include extra money or credits toward providing coverage for a domestic partner are treated as taxable income.
  • Flexible spending account benefits may not be provided to a domestic partner because such accounts can include only nontaxable income.

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

  • A domestic partner may not make an independent election of COBRA coverage. A domestic partner may be part of an employee's election.

Health Insurance Portability and Accountability Act of 1996 (HIPAA)

  • Domestic partners may not be dependents and therefore technically are not covered by HIPAA. However, an employer that provides health insurance to domestic partners may want to include them in the certification procedure and apply the other HIPAA requirements for consistency in administration.
  • San Francisco Nondiscrimination in Contracts-Benefits Ordinance, effective Jan. 1, 1997
  • The Air Transport Association of America successfully sued the City of San Francisco, claiming airlines do not have to comply with the city's domestic partner ordinance because the airlines' benefit packages are governed by federal law, specifically the Employee Retirement Income Security Act of 1974 (ERISA). ERISA pre-empts state and local laws with regard to employee benefits. In an April 10, 1998, ruling, the U.S. District Court for the Northern District of California upheld the San Francisco ordinance except with regard to airlines. In her ruling, Judge Claudia Wilkens stated that the city acts as a “market participant” in dealing with city contractors--other than airlines--and the law therefore does not violate the ERISA pre-emption provisions. However, in the city's dealing with airlines at the city-owned airport, the city acts as a regulator, and not a market participant, so therefore the ordinance is pre-empted by ERISA with regard to the airlines, the judge ruled. The ruling applies the “market participant” standard to situations where the city wields no more power than an ordinary consumer in its contracting relationships.
  • In November 1999, Los Angeles and Seattle joined San Francisco in enacting an ordinance that requires private employers that contract with the cities to provide benefits to workers' domestic partners.

Vermont Supreme Court Ruling, Dec. 20, 1999, Stan Baker, et al. vs. State of Vermont, et al.

  • This ruling stemmed from a challenge to state law brought by three same-sex couples that had been denied marriage licenses. In its unanimous ruling, the Vermont State Supreme Court held that there was no reason under the state constitution for “denying the legal benefits and protections of marriage to same-sex couples.” The Court did not give permission to legalize same-sex marriages, but instead ordered the state legislature to develop some method for implementing its decision. The Court did not give the legislature a deadline for legislative action.

    The impact on employee benefit plans will depend on what the state legislature decides. If the legislature creates a domestic partnership equivalent to marriage, then employers would be able to retain more design flexibility in their benefit plans. ERISA would shield self-funded employers from covering “domestic partners” of Vermont employees. If the legislature legalizes same-sex marriage, then ERISA would not shield self-funded employers. All other employers in Vermont would be required to cover same-sex spouses under their employee benefit plans.

    The case cannot be appealed to a federal court, because the ruling of the Vermont Supreme Court is based exclusively on Vermont's constitution.

    It is important to note that if the Vermont legislature legalizes same-sex marriage, this would have an impact on all benefit plans. Same-sex spouses in Vermont would have the same legal rights as opposite-sex spouses with regard to a defined benefit pension plan, a defined contribution pension plan, life insurance policies, family leave benefits, etc. The tax treatment of the benefits for same-sex spouses would be the same as that for opposite-sex spouses. (See tax treatment of domestic partner benefits, above.)

For more information, contact Ken McDonnell, (202) 775-6342, or see EBRI's Web site at www.ebri.org.

Sources: Melody A. Carlsen, “Domestic Partner Benefits: Employer Considerations,” Employee Benefit Practices, International Foundation of Employee Benefit Plans (Fourth Quarter 1994); Hewitt Associates, “Domestic Partners and Employee Benefits: 1994,” Research Paper (Lincolnshire, IL: Hewitt Associates); Barry Newman, Paul Sullivan, and Michele Popper, Domestic Partner Benefits: An Employer's Perspective (Newburyport, MA: Alexander Consulting Group, June 1996).

a/The following states and the District of Columbia recognize common-law marriages: Alabama, Colorado, Georgia, Idaho, Iowa, Kansas, Montana, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, and Texas.

b/The following states recognize common law marriages that are valid in other states: Arizona, Arkansas, California, Delaware, Hawaii, Maryland, Minnesota, Missouri, Nebraska, New York, North Carolina, Oregon, Tennessee, Virginia, Washington, and West Virginia. These states do not recognize common law marriages contracted in their own state.