UPDATE: On Nov. 6, 2012, voters approved same-sex marriage in Washington state. Please refer to our latest advisory for information on the impact of this new law on employee benefit plans and procedures.

On Feb. 13, 2012, Gov. Christine Gregoire signed SB 6239 legalizing same-sex marriage in Washington state. SB 6239 is often referred to as the Marriage Equality Act, and builds on the foundations set by the “everything but marriage” law, which Washington voters approved by referendum in November 2009. Under the “everything but marriage” law, state registered domestic partners are treated the same as married spouses. The Marriage Equality Act goes further, by legalizing same-sex marriage and converting most domestic partnerships into marriages.

The new law would have been effective June 7, 2012, but opponents obtained enough signatures for a referendum in November. The “everything but marriage” law was approved by referendum, and current polls are indicating that the Marriage Equality Act also will be approved on November’s ballot. While the outcome of the referendum is uncertain, if Washington voters approve the Marriage Equality Act in November, employee benefit plans and procedures will need to be in compliance. Therefore, in the interim, employers should consider the potential impact of the Marriage Equality Act on their employee benefit plans and procedures (which should already have been reviewed and revised to ensure compliance with the “everything but marriage” law).

This advisory revisits the employee benefits compliance issues that arose from “everything but marriage,” and addresses additional benefits issues arising from the Marriage Equality Act, assuming that it becomes law later this year.

What Steps Should Employers Take to Comply with the New Law?

Review health and welfare plans.

  • Review and update definitions of spouse, child and domestic partner.
  • Review eligibility provisions for parity between opposite-sex spouse and domestic partner/same-sex spouse benefits.
  • Consider whether self-insured plans should have a different definition than insured plans (see pre-emption discussion below).

Review Code Section 125 cafeteria plans.

  • Compare eligibility provisions of the Section 125 cafeteria plan to the eligibility provisions of health and welfare plans.
  • Confirm that the tax treatment and general administration of various benefit arrangements are consistent with the documents and the law.

Review nonqualified deferred compensation plans.

  • Review and update the definitions of spouse, domestic partner and beneficiary designations.

Communicate with insurance providers to provide parity in benefits for registered domestic partners and same-sex spouses and to ensure COBRA-like coverage, if desired.

Revise employee handbooks, participant communications and internal policies.

  • Reflect new benefit provisions for domestic partners and same-sex spouses.
  • Consider whether to replace your domestic partner policy with a policy that recognizes only valid marriages, except where the Marriage Equality Act continues to permit state registered domestic partnerships, such as where one of the domestic partners is age 62 or older.

Review federal tax treatment of domestic partner and same-sex spouse benefits and update administrative policies and participant communications.

Closely monitor developments related to the evolving state and federal treatment of domestic partners and same-sex spouses. Benefits policies and practices may require subsequent amendment.

What Is the New Law and How Does It Differ from “Everything but Marriage”?

“Everything but marriage” required state registered domestic partners to be treated the same as married spouses under Washington law. This means that any benefits an employer provides to a spouse must be provided to registered domestic partners, unless Washington state law is “pre-empted” (see below). “Everything but marriage” achieved this result by interpreting certain terms (such as “spouse,” “husband,” “wife” and “marriage”) throughout Washington law as applying equally to state-registered domestic partners. State-registered domestic partners can be either same-sex partners, or partners of the opposite sex if at least one partner is age 62 or older, and certain other requirements are met. Employers are not required to provide benefits to unregistered domestic partners, but may choose to do so.

The Marriage Equality Act goes further, by legalizing same-sex marriage. It achieves this by defining marriage as a civil contract between two persons (i.e. references to “male and female” and “husband and wife” in this context are deleted) and requires gender specific terms used in any statute, rule, or other law to be interpreted as gender neutral and applicable to spouses of the same sex. Marriages between same-sex spouses who are legally married in another state would be valid in Washington, and domestic partners currently in a state registered domestic partnership may get married in Washington state.

In addition, the Marriage Equality Act would convert many registered domestic partnerships into marriages, and would change the rules relating to registration of domestic partnerships. These rules are described in the next paragraph.

What Happens to Domestic Partnerships in Washington?

Given that the Marriage Equality Law would permit same-sex domestic partners to marry, it revises the rules regarding domestic partnerships in Washington, as follows:

  • Effective June 30, 2014, domestic partnerships (same or opposite sex) may register in Washington only if at least one of the partners is age 62 or older and certain other conditions are met.
  • Same-sex domestic partnerships that were registered in Washington prior to June 30, 2014 and have not been dissolved or converted into marriages will be converted automatically into marriages as of June 30, 2014, unless one of the partners is age 62 or older. To avoid automatic conversion, state registered domestic partnerships must take action to dissolve in accordance with Washington law prior to June 30, 2014.
  • Domestic partnerships validly formed in another state that provide substantially the same rights, benefits and responsibilities as marriage, but which do not meet Washington’s definition of a domestic partnership, will be treated as having the same rights and responsibilities as married spouses in Washington. However, this treatment will not apply if the partners do not get married within one year after becoming permanent residents of Washington, unless at least one of the partners is age 62 or older.

How are Insured Group Health Plans Affected?

Under “everything but marriage,” if health coverage or other benefits are provided to married spouses through an insurance policy, such benefits must also be provided to registered domestic partners. The Marriage Equality Act extends this treatment to same-sex spouses.

No formal amendment to group policies is required. While insured plans are often subject to the Employee Retirement Income Security Act of 1974 (ERISA), ERISA permits the state regulation of “insured” benefits.

How are Self-Insured Group Health Plans Affected?

Most self-insured health and welfare plans are governed by ERISA, which pre-empts state regulation. ERISA plans follow federal law, which under the federal Defense of Marriage Act (DOMA) defines ”marriage” to mean a legal union between one man and one woman as husband and wife, and “spouse” to mean a person of the opposite sex who is a husband or wife.

DOMA remains current federal law, although this may change in the future. The U.S. attorney general has stated that the Department of Justice will no longer defend DOMA because it is unconstitutional. Also, the U.S. Court of Appeals for the First Circuit recently held in Massachusetts v. United States Department of Health & Human Services that the DOMA definition of marriage is unconstitutional on equal protection grounds, although the court stayed injunctive relief pending Supreme Court review of DOMA. Therefore, currently, domestic partners and same-sex spouses cannot be “spouses” for federal law purposes.

Accordingly, self-insured health and welfare plans that are governed by ERISA are not required to provide coverage to domestic partners and same-sex spouses, and may limit the definition of “spouse” to mean an opposite-sex spouse. However, employers at their discretion may choose to provide self-insured benefits to domestic partners and same-sex spouses.

Employers who have self-insured group health plans should carefully communicate eligibility information to employees to avoid confusion and possible claims of discrimination. Also, employers should be aware that their self-insured plans may conflict with their insured plans.

Are Self-Insured Plans of Church or Governmental Entities Treated Differently?

Self-insured governmental and church plans are not subject to ERISA pre-emption and are, therefore, generally subject to the domestic partner and same-sex coverage obligations. However, the Washington state insurance commissioner has generally refused to exercise jurisdiction over these plans. Therefore, compliance will likely be enforced only through participant lawsuits.

Note: a church plan may elect to be subject to ERISA, and if a valid election is made, ERISA will pre-empt state law and the plan will not be required to provide coverage to domestic partners or to same-sex spouses.

How Does the New Law Impact Open or Special Enrollment?

There is no definitive guidance on how the new law impacts open or special enrollment. Generally, for purposes of open or special enrollment, newly registered domestic partnerships and new same-sex marriages should be treated the same as new opposite-sex marriages. For example, if the employer provides a special enrollment right to the opposite sex spouse of a newly married employee, the same special enrollment right should be provided to an employee with a newly registered domestic partner, or same-sex spouse.

Will State Law Require Coverage of Children of Domestic Partners or Same-Sex Spouses?

If an insured plan provides coverage for children, state law will require coverage of an unmarried child of a domestic partner or same-sex spouse to age 26.

With respect to an ERISA self-insured plan, health care reform does not require coverage of children of domestic partners or same-sex spouses, and ERISA will pre-empt state insurance laws. Therefore, while an ERISA self-insured plan covering dependents will be required to cover such a dependent to age 26, the ERISA plan could refuse to provide such coverage to children of domestic partners or same-sex spouses. However, the plan must have a clear definition of “spouse” and “child,” such as a spouse recognized by DOMA and a child of such a spouse, in order to achieve such a result.

Should an Employer Expect Litigation if Its Self-Insured Plan Excludes either Domestic Partners, Same-Sex Spouses, or Their Children?

Yes, domestic partner and same sex issues, and the validity of DOMA, are being actively litigated. If successful, an employee could seek retroactive enrollment. Aside from the litigation risk and distraction, an employer who is providing both insured and self-insured benefits should weigh the administrative and staff relations problems associated with having different definitions of “spouse” and “child” for different benefits.

What Are the Federal Tax Implications of Domestic Partner and Same-Sex Spouse Benefits?

Federal tax rules govern the tax treatment of domestic partner, and same-sex spouse, benefits. Generally, if a domestic partner or a same-sex spouse, and his/her dependents, are an employee’s Internal Revenue Code (“Code”) Section 105(b) tax dependents, the value of the health coverage is not subject to federal income and employment taxes, and the benefits provided will be tax-free. If a domestic partner or same-sex spouse, and his/her dependents, are not Code Section 105(b) tax dependents, generally the employee will be taxed on the premium cost of the insurance provided to such person.

To the extent a health plan provides employer-paid coverage of a domestic partner, same-sex spouse, or their children who are not tax dependents, the value of that coverage will be treated as imputed income to the covered employee and reported on Form W-2. If the employee is required to pay all or part of the cost of such coverage, those premiums may be paid by the employee with after-tax income. Or, the employee may pay them on a pre-tax basis through a Code Section 125 cafeteria plan, but the value of coverage will then be imputed back to the employee.

Also, the DOMA definition of “spouse” applies to health care flexible spending accounts, health reimbursement arrangements and health savings accounts. Therefore, an employee may obtain reimbursement from such accounts for medical expenses of a domestic partner, same-sex spouse or their children only if they are his Code 105(b) tax dependents.

Since Section 125 cafeteria plans and the underlying group health plans may define “spouse” and “dependent” differently, employers should closely compare the plan documents and make appropriate disclosures to employees.

May Employers Provide Benefits to Unregistered Domestic Partners and Opposite-Sex Domestic Partners?

Yes, but they are not required to do so. If you are making distinctions between registered and unregistered domestic partners and same- or opposite-sex partners, make sure these distinctions are described clearly in your plan documents and participant communication materials. Such distinctions may raise staff relations issues and claims of discrimination.

Is There a “Conscience Clause” Exception for Religious Entities?

No, but employers can meet compliance obligations without specifically endorsing domestic partner or same-sex spouse rights by offering employee-plus-one adult coverage or adopting a separate category of dependents that encompasses, but is not limited to, domestic partners and same-sex spouses.

How Are Retirement Plans Affected?

Retirement plans are generally governed by ERISA (except for church and governmental plans), which pre-empts state law. However, ERISA does not prevent employers from treating domestic partners, or same-sex spouses, as spouses in their retirement plans. This allows for a policy of consistent treatment across benefits such as health and retirement. For example, a default beneficiary in a retirement plan could be a registered domestic partner, or a same-sex spouse.

What About COBRA?

While employers may voluntarily offer domestic partners, same-sex spouses and their dependents a COBRA-like benefit, Washington law does not require the extension of COBRA rights to such persons. However, because COBRA does not apply, make sure that your insurance carrier (or stop-loss carrier in a self-funded plan) has approved such coverage, before you extend such coverage to same-sex spouses or domestic partners.

If you have questions or would like to discuss the application of the Washington Marriage Equality Act, please contact your usual Davis Wright Tremaine benefits lawyer.