New Jersey Domestic Partnership Act: Impact On Employer-Sponsored Health Plans

Thursday, July 1, 2004 - 01:00

New Jersey has joined a small but growing number of states (including Massachusetts, Vermont, California and Hawaii) by creating and recognizing the legal status of domestic partnerships. On January 12, 2004, New Jersey Governor James McGreevey signed into law the Domestic Partnership Act (the "Act").1 The Act, which became effective 180 days after its enactment - July 10, 2004 - formally acknowledges that "domestic partnerships. . . assist [the state of New Jersey] by their establishment of a private network of support for the financial, physical and emotional health of their participants. . . . Because of the material and other support that these. . . relationships provide to their participants, the Legislature believes that these mutually supportive relationships should be formally recognized by statute, and that certain rights and benefits should be made available to individuals participating in them."2

Under the Act, individuals who enter into a domestic partnership can obtain many of the same rights as married couples, including (but not limited to) visitation and decision-making rights in a health care setting, certain tax benefits, and (most importantly, for purposes of this article) health benefits.3 The Act also amends the New Jersey Law Against Discrimination (the "NJLAD") to include participation in a domestic partnership as a legal status that is protected from discrimination. Thus, it will be a violation of NJLAD for an employer to refuse to hire or to discharge an individual because of his or her status as a domestic partner, or to otherwise discriminate against an employee in compensation or in any other terms, conditions and privileges of employment because of his or her status as a domestic partner.4

Under the Act, two kinds of couples can qualify as a domestic partnership: (1) same-sex couples, where each individual is at least 18 years of age, and (2) opposite-sex couples, where each individual is at least 62 years of age.5 It is readily apparent why domestic partnerships would be an attractive option for same-sex couples, as such couples are not currently permitted to enter into a legal marriage in New Jersey. Domestic partnerships were made available to opposite-sex couples who are at least 62 years of age because many such couples decide to forgo marriage in order to continue receiving important benefits such as Medicare and Social Security.

To be eligible for a domestic partnership:

• both individuals must have chosen to share each other's lives in a committed relationship of mutual caring;

• both individuals must agree to be jointly responsible for each other's basic living expenses during the domestic partnership;

• both individuals must have a common residence and otherwise be jointly responsible for each other's common welfare;

• neither individual can be a member of another marriage recognized by New Jersey law, or a member of another domestic partnership; and

• the individuals must not be related by blood.6

To establish a domestic partnership, the eligible couple must file an Affidavit of Domestic Partnership with their local registrar, who will return "filed" copies of the Affidavit as well as a Certificate of Domestic Partnership to the couple.7

The Act expressly provides that "[n]othing contained in [the Act] shall be construed to require an employer to provide dependent [health] coverage for an employee's domestic partner."8 In addition, the failure of an employer to provide dependent health coverage to domestic partners of employees will not be considered discriminatory for purposes of NJLAD.9

Thus, technically speaking, the Act does not require an employer to extend health benefits to domestic partners. However, practically speaking, it may be difficult for an employer to obtain a group health policy that does not extend health benefits to domestic partners, as the Act expressly requires any "group health insurer that provides hospital or medical expense benefits under a policy that is delivered, issued, executed or renewed in [New Jersey] or approved for issuance or renewal in [New Jersey] on or after the effective date of the [Act], under which dependent coverage is available," to provide such benefits to same-sex domestic partners.10 The Act does not, however, require such an insurer to provide dependent coverage to an opposite-sex domestic partner.11

Importantly, the health benefit requirements of the Act apply to each group health insurance policy, individual health insurance policy and HMO - but not to an employer who self-insures health benefits for its employees.12 This is not merely an omission or oversight by the drafters of the Act. Rather, it is a recognition of the Federal law known as the Employee Retirement Income Security Act of 1974 ("ERISA"), which broadly preempts the application of state insurance laws to a self-insured employee benefit plan (i.e., an employee benefit plan that is funded by the general assets of an employer).13 While a discussion of ERISA preemption is beyond the scope of this article, it is clear that the Act applies to an employer providing health coverage through a group health policy, but not to an employer who self-insures health benefits.

It is unclear whether an employer could avoid the reach of the Act (and any obligation to extend health coverage to domestic partners) by obtaining health insurance from an insurer outside of New Jersey. The success of such a strategy depends on whether the health insurance could be construed as being "delivered, issued, executed or renewed in [New Jersey] or approved for issuance or renewal in [New Jersey]"14 - a provision that is undefined in the Act, but which could depend on any number of factors, such as:

• the employer's ties to New Jersey: an employer with very strong ties to New Jersey (for example, headquarters in New Jersey, or substantial operations in New Jersey) probably would have a more difficult time avoiding the reach of the Act (and any obligation to extend health benefits to domestic partners) simply by obtaining its health insurance from a foreign insurer;

• the insurer's ties to New Jersey: an insurer that is considered to be doing business in New Jersey might need to obtain approval of its policies from the New Jersey Department of Banking and Insurance, which presumably will require conformance with the Act; and

• the facts and circumstances surrounding the health insurance obtained: if the health insurance was solicited in New Jersey, negotiated in New Jersey, or executed in New Jersey, it is highly unlikely that an employer could avoid the reach of the Act simply by obtaining the insurance from a foreign insurer.

An insured employer with employees both inside and outside of New Jersey will need to decide how to address the disparities in health benefits that may be caused by the Act. An employer is under no legal obligation to extend health benefits to domestic partners outside of New Jersey (however, failing to do so could cause friction between locations and make plan administration more difficult). If the employer does decide to extend health benefits to domestic partners outside of New Jersey, it must be sure to establish and enforce clear procedures for demonstrating "domestic partner" status in jurisdictions where domestic partner registries have not been established (e.g., procedures for proving common residency and joint responsibility for each partner's welfare and finances, such as through the production of joint rental agreements, mortgage documents, leases or bills).

To the extent that an employer extends health benefits to a domestic partner, the Act permits the cost of those benefits to be borne entirely by the employee.15 Further, certain tax consequences normally taken for granted with respect to health benefits that are extended to an employee do not necessarily apply to health benefits that are extended to a domestic partner, unless the domestic partner is a "dependent" of the employee for Federal income tax purposes. Indeed, health benefits extended to a domestic partner may result in taxable income to the employee if the domestic partner does not qualify as a "dependent." To be a "dependent" for Federal income tax purposes, a domestic partner must, in addition to other requirements, receive over half of his or her support from the employee and have gross income of less than a specified amount ($3,100 for 2004).16 Many domestic partnerships consist of two wage earners. In such partnerships, neither domestic partner is likely to satisfy the gross income test needed for qualification as a "dependent" for Federal income tax purposes. Thus, in many (if not most) instances, the extension of health benefits to the domestic partner of an employee will result in taxable income to the employee. By contrast, the extension of health benefits to the spouse of an employee does not result in taxable income to the employee.17

Similarly, health benefits extended to a domestic partner of the employee are not reimbursable under a "flexible spending account" or "cafeteria plan" of an employer, unless the domestic partner is a "dependent" of the employee. By contrast, health benefits extended to the spouse of an employee generally are reimbursable under such arrangements.18

Overall, it appears that the health benefit requirements of the Act will not have a significant impact on most employers. To be sure, the Act will have some administrative impact on employers, as they must determine in each case whether employees are and remain members of legitimate, legally recognized domestic partnerships. However, the Act greatly simplifies this determination by providing for Certificates of Domestic Partnership that can be furnished as proof of legitimate domestic partnerships. Also, employers are permitted to pass-along the full cost of domestic partner benefits to employees who request such benefits. While employers may still experience increases in their health care premiums if insured claims increase, it seems unlikely that extending dependent coverage to domestic partners would have a significant adverse effect on overall claims - particularly in light of the fact that employees with domestic partners are likely to comprise a relatively small number of the workforce and that many employees may decide to forgo such health benefits anyway, given the cost of such coverage and the negative tax consequences associated therewith.

Moreover, many employers already may have opted voluntarily to extend health benefits to domestic partners, for any number of social and economic reasons, including the desire to promote and demonstrate a commitment to a diverse workforce, or to improve employee morale and recruitment. Indeed, a recent survey of more than six hundred employers (conducted by Mellon Financial) suggests that nearly 35% of employers now offer domestic partner benefits (in one form or another) to their employees, compared with only 6% of employers in 1996.19 Obviously, for the employer already extending health benefits to domestic partners, the Act is unlikely to result in a meaningful increase in the employer's costs of providing health coverage or the administration of its health plan.1 The Domestic Partnership Act, A-3743, 210th Leg. at § 2 (N.J. 2004).
2 See id. at §§ 2(b)-(d).
3 See id. at § 2(d).
4 See id. at § 11(a).
5 See id. at § 4.
6 See id.
7 See id.
8 See id. at § 57(b).
9 See id. at § 57(c).
10 See id. at § 51.
11 See New Jersey Department of Banking and Insurance Bulletin No. 04-08 at 1 (May 14, 2004).
12 See The Domestic Partnership Act, A-3743, 210th Leg. at §§ 47-58 (N.J. 2004).
13 See generally 29 U.S.C. § 1144 (2004).
14 See The Domestic Partnership Act, A-3743, 210th Leg. at §§ 47-58 (N.J. 2004).
15 See id. at § 57.
16 See 26 U.S.C. §151 (2004).
17 See 26 U.S.C. §§ 105, 106 (2004).
18 See 26 U.S.C. § 125(f) (2004).
19 See Mellon Financial, Employers Increase Work/Life Programs, According to Results of Mellon Survey (visited June10,2004).

Andrew E. Graw heads Lowenstein Sandler's Executive Compensation and Employee Benefits Practice Group, and is a Member of the firm. Mark E. Seidel is an Associate in the firm's Tax Department. Mr. Graw can be reached at (973) 597-2588. Mr. Seidel can be reached at (973) 597-6190.

Please email the authors at agraw@lowenstein.com or mseidel@lowenstein.com with questions about this article.