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Benefits Discrimination for Domestic Partners


Guest mcapuano
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Guest mcapuano

I have a self-insured medical practice client with 450 insured employees. 150 or so are physicians who are also owners/partners. They want to extend health & welfare benefits for non-married Domestic Partners (DPs) of the opposite or same sex, but only for the owners/partners. I have researched the DOL, ERISA, IRS and OHIO ORC and other than perhaps running afoul of non-discrimination rules under IRC Section 105(h), I cannot find any language anywhere else that would label this practice as discriminatory nor prevent them from adopting such a policy. My understanding, based on hours of research, is that they can in fact adopt such a policy and even if it were discriminatory in favor of the Highly Compensated Employees (HCEs), the only consequence is that the employer would be required to include the value of the benefits paid in the employee's gross taxable pay.

However, I'm not sure this is even a point worth making since under current IRS rules, the value of the benefits paid to a non-spouse or, non-married domestic partner are taxable anyway.

If anybody has any insight to this with legislative reference, I would greatly appreciate it!

Thanks!

Mark

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Mark,

Your description of the tax impact appears to be a correct understanding, assuming that the owners/partners are really owners/C Corp shareholders rather than true partners. The tax exclusion however is not only of the value of the coverage but also the value of the health expenses paid out. That could create significant amounts of taxable income for the owners/partners.

Your post suggests that this is a single-employer situation. As such, the self-insured health program might be exempt from state insurance regulation and registration requirements, if ERISA applies.

Extending coverage to those who are not legally wed spouses or dependents of employees might of itself take the self-insured program out of ERISA preemption and thus subjecting it to state insurance regulation and registration requirements. You ought to vet that concern out, and get a legal opinion before extending coverage in the way you suggest. Perhaps Ohio registration and regulation as a 'health insurer' is manageable, but then maybe it is not and would be a deal-killer.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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  • 1 month later...
Guest LMPett

Mark - Normally if you tax employees on the fair market value of coverage for domestic partners (or any other non-IRS dependent), the benefits reimbursed by the plan are excluded from income. I think this is what you were referring to when you noted that "benefits", i.e., the FMV of coverage, are taxed regardless.

However, since the plan is self-insured and will definitely be discriminatory if you just open DP eligibility to owners, you need to examine Sec. 105-11(e) more closely. The employee won't just be taxed on the fair market value of coverage, but on a portion of benefits reimbursed:

(e) Excess reimbursement of highly compensated individual—(1) In general. For purposes of section 105(h) and this section, a reimbursement paid to a highly compensated individual is an excess reimbursement if it is paid pursuant to a plan that fails to satisfy the requirements of paragraph ©(2) or ©(3) for the plan year. The amount reimbursed to a highly compensated individual which constitutes an excess reimbursement is not excludable from such individual's gross income under section 105(b).

(2) Discriminatory benefit. In the case of a benefit available to highly compensated individuals but not to all other participants (or which otherwise discriminates in favor of highly compensated individuals as opposed to other participants), the amount of excess reimbursement equals the total amount reimbursed to the highly compensated individual with respect to the benefit.

(3) Discriminatory coverage. In the case of benefits (other than discriminatory benefits described in subparagraph (2)) paid to a highly compensated individual under a plan which fails to satisfy the requirements of paragraph ©(2) relating to nondiscrimination in eligibility to participate, the amount of excess reimbursement is determined by multiplying the total amount reimbursed to the individual by a fraction. The numerator of the fraction is the total amount reimbursed during that plan year to all highly compensated individuals. The denominator of the fraction is the total amount reimbursed during that plan year to all participants. In computing the fraction and the total amount reimbursed to the individual, discriminatory benefits described in subparagraph (2) are not taken into account. Accordingly, any amount which is included in income by reason of the benefit's not being available to all other participants will not be taken into account.

(4) Examples. The provisions of this paragraph are illustrated by the following examples:

Example (1). Corporation M maintains a self-insured medical reimbursement plan which covers all employees. The plan provides the following maximum limits on the amount of benefits subject to reimbursement: $5,000 for officers and $1,000 for all other participants. During a plan year Employee A, one of the 5 highest paid officers, received reimbursements in the amount of $4,000. Because the amount of benefits provided for highly compensated individuals is not provided for all other participants, the plan benefits are discriminatory. Accordingly, Employee A received an excess reimbursement of $3,000 ($4,000−$1,000) which constitutes a benefit available to highly compensated individuals, but not to all other participants.

Example (2). Corporation N maintains a self-insured medical reimbursement plan which covers all employees. The plan provides a broad range of medical benefits subject to reimbursement for all participants. However, only the 5 highest paid officers are entitled to dental benefits. During the plan year Employee B, one of the 5 highest paid officers, received dental payments under the plan in the amount of $300. Because dental benefits are provided for highly compensated individuals, and not for all other participants, the plan discriminates as to benefits. Accordingly, Employee B received an excess reimbursement in the amount of $300.

Example (3). Corporation O maintains a self-insured medical reimbursement plan which discriminates as to eligibility by covering only the highest paid 40% of all employees. Benefits subject to reimbursement under the plan are the same for all participants. During a plan year Employee C, a highly compensated individual, received benefits in the amount of $1,000. The amount of excess reimbursement paid Employee C during the plan year will be calculated by multiplying the $1,000 by a fraction determined under subparagraph (3).

Example (4). Corporation P maintains a self-insured medical reimbursement plan for its employees. Benefits subject to reimbursement under the plan are the same for all plan participants. However, the plan fails the eligibility tests of section 105(h)(3)(A) and thereby discriminates as to eligibility. During the 1980 plan year Employee D, a highly compensated individual, was hospitalized for surgery and incurred medical expenses of $4,500 which were reimbursed to D under the plan. During that plan year the Corporation P medical plan paid $50,000 in benefits under the plan, $30,000 of which constituted benefits paid to highly compensated individuals. The amount of excess reimbursement not excludable by D under section 105(b) is $2,700: <MATH SPAN="1" POSITION="NOFLOAT" BORDER="NO[/i]

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