Friday, December 3, 2004

California health insurers mandated to offer domestic partner coverage

A story published today in the City Business Journal reports that beginning January 1, health providers in California will have a new mandate.

Starting next year, insurers and HMOs in California won't be able to sell group health insurance coverage that treats domestic partners differently than spouses.

State law now requires health insurers simply to offer domestic coverage as an elective, but not all employers or other plan sponsors have made use of the offer.

Under the new California Insurance Equality Act, effective Jan. 1, they won't have a choice. If a group policy provides benefits to spouses, it must provide them in the same way to domestic partners.

The law will likely hit hardest for smaller employers. Many large companies provide self-insured benefits, which are exempt from the new rules.

But it could present pitfalls for almost any employer.

Who qualifies

First, employers will need to know what a domestic partner is, which isn't as easy as it may sound.

Definitions vary among the state and local jurisdictions. The state defines domestic partners as same-sex couples, and opposite-sex couples where one of the pair is eligible for Social Security benefits for the aged and is older than 62. Partners must also be unmarried, able to consent, unrelated by blood and live together.

But some cities -- Sacramento, Los Angeles and San Francisco among them -- recognize opposite-sex couples as domestic partners even if neither is over the age of 62.

For their relationship to be legally recognized, a couple must file a declaration of domestic partnership with the California Secretary of State or with a local agency, such as the Sacramento City Clerk's office.

Employers will have to recognize all the legally created domestic partnerships, and they will have to take care to treat domestic partners and spouses equally as they administer benefits, said Sacramento employment attorney Elizabeth Ison. For instance, if a company requires domestic partners to show legal documents proving their relationship -- as it should, Ison said, -- it also must ask spouses to show copies of their marriage certificates. Otherwise, the company would be discriminating against domestic partners.

California is the first state to require equal insurance coverage for domestic partners. The law also applies to life, disability and other types of insurance.

Businesses should also communicate with employees about the insurance changes, and they should amend their employee handbooks. Ison recommends that they also consult an attorney who specializes in employment law. "Just be really careful, and hire somebody who's on top of their game," she said.

Meanwhile, payroll administrators will have to be on top of the new law too, because benefits for domestic partnerships are taxed differently than benefits for spouses.

A taxing problem

The federal and state governments do not tax benefits for spouses. But the federal government taxes benefits for domestic partners because it does not recognize those relationships.

An employee who receives benefits for a domestic partner has to pay for the premium with after-tax dollars and then pay taxes again on the cost of the benefit because it counts as income, said Tom Morrison, vice president of Segal Co., a human resource, benefits and compensation consulting firm based in New York. Employer payroll departments then will have to make arrangements so the appropriate taxes are withheld and reported, Morrison said.

But there's more. Taxes on benefits for domestic partners also vary according to whether the partnership meets the state definition or a local jurisdiction's expanded definition. Benefits for partners who have filed a valid declaration of domestic partnership with the California Secretary of State are exempt from state income taxes. But the benefits for domestic partners whose relationships meet a local agency's definitions but not the state's definition would be subject to state income tax.

The heavy tax burden is one reason Morrison projects very little participation in the domestic partner benefits program. "It becomes very expensive, and the domestic partner is able to do better on his own."

Nationwide the participation rate in domestic partner benefits is less than 1 percent. Even in groups where there is little stigma associated with domestic partners, such as the performing arts guilds in Southern California, participation is minimal, Morrison said.

Opens door to coverage for some

Still, Steve Hanson, a legislative advocate for Equality California -- the lesbian, gay, bisexual and transgender rights group that sponsored the bill -- says it's a big step forward. "There are an enormous amount of people who don't have access to coverage," he said.

Even with the tax implications, Hanson said, the new law is a huge benefit to partners who wouldn't otherwise be able to get insurance. And, he said, the law prevents plans from making domestic partners pay higher premiums or jump through more hoops than spouses to get the coverage.

Health insurance companies, meanwhile, say they expect no impact from the new law because they have already been offering domestic partner coverage.

"PacifiCare as an employer offers domestic partner coverage, and I know many of our other employers offer it already too, so it's something that's been out there for a while," said PacifiCare spokeswoman Cheryl Randolph.

Now it's just a matter of making all employers aware of the law next year when they renew their policies, she said.

The California Association of Health Plans was neutral on the bill that became the California Insurance Equality Act, but some plans, such as Kaiser Permanente, supported it.

The new rules also broaden the state's paid family leave regulations, allowing workers to take leave if a domestic partner or a domestic partner's child has a serious health condition.

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