Civil Unions: Federal Tax and Benefit Implications

Last week, we addressed some of the implications of Delaware’s Civil Union and Equality Act (the “CUEA”) of 2011, which will become effective on January 1, 2012. In this post, we will address the ways in which the bill may or may not affect employers whose benefit structure is governed by federal law.3D Figure Holding Hundred Dollar Bill

As a preliminary matter, it is important to recognize that the CUEA is a Delaware law, so it  has limited impact on matters governed by federal law. By contrast, the definition of marriage under federal law is governed by the Defense of Marriage Act (“DOMA”), which defines marriage as being between one man and one woman. While the Obama Administration has indicated that it believes DOMA is unconstitutional, and will no longer defend the statute in court, DOMA is still in effect. Consequently, for federal tax and ERISA purposes, the definition of marriage remains limited to heterosexual relationships.

Federal Employee Benefits

Many employers who provide benefits to their employees are governed by ERISA, not state law. ERISA governed benefits include both healthcare and retirement benefits, such as health insurance, life insurance, and 401k. If you are a private employer who pays for a portion of the benefits provided to your employees, chances are good that you are subject to ERISA. Because ERISA preempts state law, an employer subject to ERISA generally cannot be required to provide benefits to partners in a civil union.

There is an important distinction, however, between insured and self-insured plans. While self-insured plans are fully governed by ERISA, insured plans are subject to an exception that leaves them open to state insurance laws. Consequently, to the extent that Delaware’s insurance code or regulations imposed by the Insurance Commissioner require coverage or benefits for married spouses and civil union partners, those laws or regulations will apply to insured ERISA plans.

It is important to remember, however, that just because you may not be required to provide such benefits doesn’t mean you can’t provide them. Many employers have determined that it is good policy to provide equal benefits to homosexual and heterosexual partners, regardless of marital status. If your business subscribes to that philosophy, there is no reason to change it now.

Taxation of Employee Benefits

Federal taxation of employee benefits will not be altered by the CUEA. Under federal tax law, insurance and other benefits provided to an employee’s spouse are generally tax exempt. Similar benefits provided to a civil union or domestic partner are generally not tax  exempt. That will not change.

However, employers should be aware of an exception to this rule. Benefits provided to a civil union or domestic partner, where the partner is a tax dependent (i.e. the partner receives more than 50% of his or her support from the employee), are tax exempt regardless of marital status. For example, if an employee’s partner stays home to care for children, and is covered under the employee’s health insurance, the value of the insurance benefit to the partner is tax exempt, regardless of marital status. This exception does not apply to cafeteria or flexible spending plans.

Learn More!

The attorneys of Young Conaway’s Employment Law Section will be discussing the contours of the CUEA and its employment law implications at the Annual Employment Law Seminar, on May 11, 2011. Please join us to learn more about this topic, which is sure to impact all Delaware employers directly or indirectly!

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