Publications /
McDermott
Newsletters / Civil Unions Legalized in Illinois; Implications for Employee
Benefit Plans
Civil Unions Legalized in Illinois; Implications for Employee
Benefit Plans
February 1, 2011
The recent legalization of civil unions in Illinois raises implications
for employee benefit plans. Employers should take action now to prepare
for requests for benefit coverage from employees planning to enter to a civil
union with a same-sex or opposite-sex partner once the law takes effect on June
1, 2011.
Employers in Illinois may soon experience an increase
in requests for benefits coverage for civil union partners once a law legalizing
civil unions for same-sex and opposite-sex partners takes effect June 1,
2011. Signed by Governor Quinn January 31, 2011, the law
entitles civil union partners in Illinois to enjoy all of the legal rights and
obligations that opposite-sex spouses are entitled to under Illinois
law. In addition, Illinois will recognize as a civil union
any same-sex marriage, civil union or substantially similar legal relationship
entered into in other states. (Ten other states and the
District of Columbia currently permit same-sex marriages, civil unions or
spousal-equivalent domestic partnerships.)
Employers may want to review their employee benefit
plans in preparation for requests for benefits coverage from employees who enter
into a civil union. The most common requests for benefits for
a civil union partner are likely to be coverage under an employerfs medical,
dental and vision plans, and survivor annuity coverage under defined benefit
pension plans.
Medical, Dental and Vision Benefits
Health
Benefits
Employers with insured
health plans with insurance contracts issued in Illinois will be required to
extend coverage to an employeefs civil union partner if the plan provides
coverage for other employeesf spouses. However, an employer
will not be required to extend such coverage if the employerfs health plan does
not provide spousal coverage (which is relatively uncommon), if the plan is a
self-insured health plan (i.e., a plan that pays for benefits out of the
companyfs general assets) or if the plan is insured with an insurance contract
issued in a state without a civil union law.
Employers that are required to or that voluntarily
extend health coverage to employeesf civil union partners will need to amend
their health plans, enrollment and other communication materials, and the
underlying insurance or stop-loss contracts to provide for this
coverage.
Continuation
Coverage
Civil union partners
are not entitled to continuation coverage under the Consolidated Omnibus
Reconciliation Act of 1985 (COBRA) because federal law does not recognize civil
unions. However, employers that enroll a civil union partner
in the companyfs health plan may want to permit partners to extend coverage in a
manner that is consistent with COBRA coverage. In addition,
small employers may be required to offer continuation coverage to same-sex
partners pursuant to certain state laws.
Taxation
Employers
with medical, dental or vision plans that provide coverage for an employeefs
civil union partner will need to ensure the employee is properly taxed on these
benefits. Employees who enroll a civil union partner in an
employer-sponsored medical, dental or vision plan should pay a gmarriedh or
gemployee plus oneh premium to cover the partner in the same way that an
employee with an opposite-sex spouse would pay for spousal
coverage. Because civil unions are not recognized under
federal law, employers must impute income to the employee for federal income tax
purposes equal to the fair market value of the coverage given to an employeefs
partner, unless the partner otherwise qualifies as a gdependenth of the employee
pursuant to Section 152 of the Internal Revenue Code or the employer decides
to gross-up
the employee. In addition, the employee may not make
pre-tax contributions to a Section 125 cafeteria plan on behalf of a
non-dependent partner (i.e., contributions for the civil union partner
generally must be after-tax) and may not receive reimbursement for expenses of
the non-dependent partner from flexible spending accounts (FSAs), health
reimbursement accounts (HRAs) or health savings accounts (HSAs).
However, because civil union partners in Illinois are
entitled to all of the rights and benefits as spouses, the value of
employer-provided medical, dental and vision coverage is not taxable for
Illinois state income tax purposes, and premiums for these benefits may be paid
on a pre-tax basis for Illinois state income tax purposes.
Employers will need to adjust their payroll systems accordingly.
Retirement Benefits
The Illinois civil union law will not require
non-government employers with qualified retirement plans, such as 401(k) and
defined benefit pension plans, to extend spousal benefits to civil union
partners since these plans are regulated solely by federal
law. However, employers that want to provide full parity for
civil union partners under these retirement plans may want to consider amending
their plans as described below.
Defined Contribution
Plans
Employers that want to
provide full parity in benefits for civil union partners under a defined
contribution plan may want to consider two changes to their plans that can be
made without any additional cost to the employer. First,
employers can amend their plans to identify civil union partners as default
beneficiaries for employees who fail to designate a beneficiary or whose
beneficiary predeceases them. A second change that employers
may want to consider is to allow an employee to obtain an optional hardship
withdrawal for IRS-recognized expenses related to a civil union partner (and
perhaps other non-spouse beneficiaries).
Defined Benefit
Plans
Federal law requires
defined benefit plans to pay a married employeefs benefits over the joint lives
of the employee and his or her opposite-sex spouse, as well as to provide a
preretirement survivor annuity payable to the employeefs spouse if the employee
dies before his pension benefit commences. Employers that
want to provide party in benefits for civil union partners under their defined
benefit plans may want to amend their plans to permit employees to elect an
annuity that is payable over the joint lives of the employee and his or her
civil union partner. In addition, employers may want to allow
civil union partners to receive a death benefit if the employee dies before
retirement. Adding additional death benefits to defined
benefit plans can be expensive at first blush; however, many large companies
have converted their traditional defined benefit plans into so-called ghybrid
plans,h such as cash balance plans or pension equity plans, where the
participantfs benefit can be paid in a lump sum. In those
types of plans, revising the death benefit to cover civil union partners or any
other designated beneficiary may not increase the cost of the plan
significantly.
Other Benefits
Employers can choose whether to extend other types of
benefits to an employeefs civil union partner, but Illinois law does not require
such extension. Examples of optional benefits include
long-term care insurance or home and automobile insurance, which an employer
normally can extend to civil union partners without incurring additional
costs. Employers may also choose to extend other benefits for
which the employer incurs the cost on behalf of civil union partners, such as
life insurance, employee discounts, moving/relocation expenses or bereavement
and funeral expenses.
What Employers Should Do Now
Because implementing changes to employee benefit plans
can often be complex, employers may want to review their current benefit plans
to assess their obligations and options with respect to providing benefits to
civil union partners once the new law takes effect on June 1,
2011. In addition, employers will need to take steps to
understand and prepare for the conflicting federal and state tax consequences of
offering certain benefits to civil union partners.
Author(s)
© 2011 McDermott Will & Emery