Civil Unions Legalized in Illinois - Implications for Employee Benefit Plans

Todd Solomon
March 8, 2011 — 2,375 views  
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Employers in Illinois may soon experience an increase in requests for benefit coverage for civil union partners now that a law legalizing civil unions for same-sex and opposites-sex partners will takes effect on June 1, 2011.  The bill was signed into law by Governor Pat Quinn on January 31, 2011. 

Civil union partners in Illinois will be entitled to enjoy all of the legal rights and obligations that opposite-sex spouses are entitled to under state law.  In addition, Illinois will recognize a same-sex marriage, civil union, or substantially similar legal relationship that is entered into in another states as a civil union.

Employers in Illinois may want to review their employee benefit plans in preparation for requests for benefit coverage from employees who enter into a civil union once the law takes effect.  The most common requests for benefits for a civil union partner are likely to be for coverage under an employer’s medical and dental plans and for survivor annuity coverage under defined benefit pension plans.

Medical, Dental and Vision Benefits

Health Benefits.  Employers with health plans insured using insurance contracts issued in Illinois will be required to extend coverage to an employee’s civil union partner if the plan provides coverage for other employees’ spouses.  However, an employer with a health plan that does not provide spousal coverage, with a self-insured health plan (i.e. a plan that pays for benefits out of the company’s general assets), or with a health plan insured using an insurance contract issued in the majority of other states will not be required to do so.  Employers that are required to or that choose to extend health coverage to employee’s civil union partners will need to amend their health plans and the underlying insurance contracts (unless the plan is self-insured) to provide for this coverage.

Continuation Coverage.  Although not required to do so, employers that permit employees to enroll a civil union partner in the company’s health plan may want to extend continuation coverage upon termination of the partner’s coverage in the health plan, similar to coverage that must be extended to employees and their opposite-sex spouses and dependent children under the Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”).  Although civil union partners are not entitled to continuation coverage under COBRA since federal law does not recognize civil unions, employers may permit partners to extend coverage in a manner that is consistent with COBRA coverage.  COBRA-like continuation health coverage is a benefit that employers can offer to civil union partners without incurring any costs for the employer since, under many employers’ plans, the employee pays the full cost of the partner’s continuation coverage.

Taxation.  Employers with medical, dental or vision plans that provide coverage for an employee’s civil union partner will need to ensure that 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 “married” or “employee plus one” 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 employee’s partner, unless the partner otherwise qualifies as a “dependent” of the employee.  In addition, the employee may not make pre-tax contributions to a section 125 cafeteria plan on behalf of the partner (i.e. contributions for the spouse must be after tax) and may not receive reimbursement for expenses of the 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 this coverage is not taxable for state income tax purposes.

Retirement Benefits

The Illinois civil union law will not require 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 if the beneficiary designated by an employee dies before the employee. A second change that employers may want to consider is including civil union partners in optional hardship distributions to the same extent as opposite-sex spouses. 

Defined Benefit Plans.  Federal law requires defined benefit plans to pay a married employee’s 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 employee’s 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 be eligible to receive a preretirement survivor annuity.

Voluntary Benefits

Employers that provide certain voluntary benefits to their employees’ spouses can choose whether to extend these benefits to an employee’s civil union partner since Illinois law does not require these types of benefits to be extended to civil union partners.  Examples of such benefits can include long-term care insurance or home and automobile insurance, which an employer can easily extend to civil union partners without incurring additional costs for the employer since the employee pays the full cost of the benefit.  Employers may also choose to extend other voluntary 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.  In addition, employers will need to understand the conflicting federal and state tax consequences of offering certain benefits to civil union partners.

Todd Solomon

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Todd A. Solomon is a partner in the law firm of McDermott Will & Emery LLP based in the Firmís Chicago office. As a member of the Employee Benefits Department, Toddís practice is concentrated primarily on designing, amending, and administering pension plans, profit sharing plans, 401(k) plans, employee stock ownership plans, 403(b) plans, and nonqualified deferred compensation arrangements. He also counsels privately and publicly-held corporations and tax-exempt entities regarding fiduciary issues under ERISA, employee benefits issues involved in corporate transactions, executive compensation matters, and the implementation of benefit programs for domestic partners of employees. A portion of his practice consists of advising clients on fiduciary and plan investment matters. Todd has experience counseling plan fiduciaries with respect to investment policies, alternative investments (e.g., hedge funds, limited partnerships, real estate), prohibited transaction issues, investment management agreements, and payment of expenses from plan assets.