Are domestic partner benefits a good deal?
- Domestic partner health benefits have gone mainstream in a relatively short time.
- Employers can require couples to meet relationship criteria and provide proof.
- Employees owe income tax on employer-paid premiums for a partner's insurance.
Domestic partner benefits have been available from many large, private companies in the U.S. for years, and now more counties, cities, towns and school boards also are offering health insurance and other benefits to their workers' same-sex or unmarried opposite-sex partners.
If you work for an employer that recently introduced domestic partner benefits, or if your company already has them and you recently entered into a domestic partner living arrangement, you'll want to find to out about eligibility.
It was barely 20 years ago that jeans maker Levi Strauss & Co. became the first Fortune 500 company to offer domestic partner benefits. Now, the practice has become almost standard.
The Human Rights Campaign, the largest gay-rights group in the U.S., reports that gay couples can take advantage of benefits offered by most of the nation's largest employers, those with more than 5,000 workers.
Qualifying can be tricky
"In states that recognize gay marriage or a civil union, you can use your marriage or civil union status to prove your partner is eligible for health insurance benefits," says Susan Pisano, a spokeswoman for the trade group America's Health Insurance Plans. "In other states, proving eligibility is a little more complicated."
Todd Solomon, a Chicago attorney and author of "Domestic Partner Benefits: An Employer's Guide," says the process of qualifying for domestic partner benefits can be burdensome in many cases, although some companies don't require much proof.
"Some employers require employees to prove they have been together for a certain time period, such as 12 months, or that the couple is financially interdependent," says Solomon. "You may need to provide a copy of a lease or a mortgage or a joint bank statement, but it varies widely from one employer to another."
Most employers require a couple to meet criteria such as these, says the Employee Benefit Research Institute, a think tank in Washington, D.C.:
- Both partners must meet a minimum age requirement, usually 18.
- The partners cannot be related by blood closer than permitted by state law for marriage.
- The partners must be in a committed relationship.
- The relationship must be exclusive.
- The partners' finances must be intertwined.
Where you live can make things easier
In some places, local laws help to set domestic benefit requirements, Solomon says.
"In San Francisco, the 'equal benefits ordinance' says that companies that do business with the city government cannot require more of domestic partners in terms of proof of eligibility than they do of married couples," he says. "Absent a law, the definition of a domestic partner and required proof is up to the employer's discretion."
Barbara Sanchez-Salazar, an employee benefits attorney with the Fowler White Boggs law firm in Jacksonville, Fla., says employees pursuing domestic partner benefits need to decide if they're comfortable providing the requested information or if they can modify the form and provide less.
"Some companies can ask you things like: 'Are you agreeing to be financially responsible for each other?' And, 'How many months has it been since your prior relationship?'" she says.
Once a couple has determined they are eligible, they next need to decide if the benefits are cost-effective, Salazar says.
Tax implications of domestic partner benefits
"The biggest issue with domestic partner benefits is that they are tax-inefficient," says Solomon.
Domestic partners cannot pay joint federal income taxes the way married couples do, and even gay married couples cannot file jointly because of the federal Defense of Marriage Act, defining marriage as only between a man and a woman. "Since health insurance benefits are typically a pretax benefit, the employee will have to pay income taxes on the portion of the domestic partner's health insurance premium paid by the employer," Solomon notes.
For example, if the value of the employer-paid portion of the domestic partner's health insurance premium is $200 per month, then that $2,400 per year would be considered taxable compensation to the employee.
Solomon says some companies provide tax relief from domestic partner benefits in the form of a "grossing up," or additional compensation to cover the extra taxes.
"Unless the employer offers a 'grossing up,' the employee will either need to pay that tax at the end of the year, or their employer can withhold it from their wages periodically," says Solomon.
Sanchez-Salazar points out that the rules on domestic partner benefits could change, since there are multiple court cases regarding this issue.
"Right now, health insurance is a nontaxable benefit for you, your spouse and your children -- but not for domestic partners," she says.
Cost comparison of health insurance benefits
Even with the tax burden for unmarried couples, "employee-sponsored health insurance is (generally) cheaper than purchasing health insurance on the individual market because there's typically an employer subsidy," says Pisano, of America's Health Insurance Plans.
Sanchez-Salazar, the employee benefits attorney, says if the partners have the option of obtaining health insurance coverage separately through their respective employers, it may be more cost-effective than joint coverage under domestic partner benefits. She says each partner will get the benefit of an employer contribution that won't be taxed.
Domestic partners should compare costs, coverage and the potential tax implications from all the health insurance policies available from each partner's employer. They also need to look closely at the benefits offered by each plan "because not every benefit applies automatically to both spouses and domestic partners," says Solomon, the Chicago attorney and author.
For example, he says when an employee leaves a job but wishes to maintain health insurance under the federal Consolidated Omnibus Budget Reconciliation Act, or COBRA, that coverage may not be automatic for the employee's domestic partner.