- March 23, 2011
Signed by Governor Quinn on January 31, 2011, the new law will permit parties to a civil union to enjoy the same legal rights and obligations provided to opposite-sex spouses in Illinois. Illinois will also recognize such unions entered into in other states with similar laws, currently ten states and Washington, D.C. Parties to a “civil union” can be members of the same sex or the opposite sex, and must go through an “application, licensing, certification” process with state officials to obtain recognition of the union.
Employers should review their benefit plans now to prepare for the law which goes into effect in Illinois on June 1, 2011. Employers should expect to see increased requests for health coverage and surviving spouse benefits under retirement plans.
Coverage for an employee’s civil union partner will be required under health insurance contracts issued in Illinois if the plan provides spousal coverage. Such coverage will not be required if the plan is self-insured, is covered by an insurance contract from a state without a civil union law, or does not provide spousal coverage.
Amendments to health plans, enrollment forms, and other communication materials will need to be made by employers required to, or who voluntarily, extend coverage to their employees’ civil union partners. Note that health coverage should never be voluntarily extended to any employee, retiree, civil union partner, or other individual not covered by the express eligibility provisions of the underlying insurance contracts without first amending the contracts. If an amendment is not done, the insurer may deny that individual's claims as not being pursuant to the plan terms and the employer is then directly liable for the medical expenses, which could be substantial.
Because the federal Defense of Marriage Act (DOMA) does not recognize civil unions, parties to a civil union are not entitled to continuation coverage under COBRA (Consolidated Omnibus Reconciliation Act of 1985). However, an employer that wants to provide coverage consistent with COBRA to a civil union partner can do so but, again, this should be done only after approval from the insurer. Continuation coverage for civil union partners may be required by states which have laws similar in nature to COBRA. Illinois has such a law, which will recognize civil unions, effective June 1.
Taxation of Health Benefits
Proper tax reporting will require employers to revise their payroll systems. Because civil unions are not recognized under federal law, employees providing coverage for their civil union partners have imputed income equal to the excess of the fair market value of the coverage provided to the civil union partner over the amount paid by the employee for such coverage. There is an exception to this taxation if the civil union partner qualifies as a dependent of the employee under Section 152 of the Internal Revenue Code (IRC). The imputed amount is subject to income tax withholding, FICA and FUTA.
An employee may not make pre-tax contributions to a cafeteria plan under Section 125 of the IRC on behalf of a non-dependent partner. The employee also may not receive reimbursements from flexible spending accounts, health reimbursement accounts, or health savings accounts for the expenses of the non-dependent partner.
In contrast, because Illinois provides the same rights and benefits to civil union partners as to spouses, employer-provided health coverage is not taxable for state income tax purposes. Premiums for these benefits can also be paid on a pre-tax basis for Illinois income tax purposes.
The new civil union law will not require non-government employers with 401(k) and other retirement plans qualified under the Internal Revenue Code to provide spousal benefits to civil union partners because those plans are regulated by ERISA (Employee Retirement Income Security Act of 1974) and DOMA, which preempt state law. Employers who wish to provide such benefits to civil union partners may amend their plans to do so. However, such changes to a benefit plan can increase costs and should be reviewed with the plan's actuary.
Other Employee Benefits
Examples of other benefits which could be affected include long-term care insurance, life insurance, employee discounts, family care and medical leave, and moving/relocation expenses. Once a benefit is offered to spouses, it could be prohibited discrimination to not offer it to civil union partners.
The Next Step for Employers?
Implementing these changes in employee benefit plans can be complex. Therefore, it is advisable that employers review their benefit plans now to evaluate their obligations and options in providing benefits to civil union partners when the new law becomes effective on June 1, 2011. Conflicting federal and state tax laws will create reporting problems which will need to be resolved.
Civil union law is in its infancy stage. State laws differ from one anther. The application of ERISA and DOMA is uncertain. ERISA preempts state law and defines marriage as opposite sex due to DOMA. However, the constitutionality of DOMA is being litigated. The Obama administration has chosen not to defend the constitutionality of DOMA, but Congress apparently will. Employers must comply with the civil union law as it applies to them, but its application will be in a stage of flux for some time.