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A court decision means employers may be required to provide full spousal benefits to gay couples.
Kate O'Sullivan, CFO Magazine
March 1, 2004
Since 1982, when the Village Voice offered domestic-partner benefits to its employees, some 41 percent of the Fortune 500, along with thousands of smaller companies, have followed suit, according to the Human Rights Campaign. But in the wake of a recent Massachusetts Supreme Judicial Court ruling granting gay couples the right to marry, employers will face significantly greater demand for such benefits. In Massachusetts they may soon be required to offer full spousal benefits to gay couples who wed.
In its 4-to-3 decision on November 18, Massachusetts's highest court gave the state legislature 180 days to figure out a way to enact the ruling. Although the state senate responded with a civil-unions proposal, the court rejected that possibility, saying that civil unions without the title of marriage would create "unconstitutional, inferior, and discriminatory status for same-sex couples" (see "Legal Unease," at the end of this article).
Although legal and benefits experts are in a wait-and-see mode, they say it's not too soon for employers to start thinking about which benefits they may need to add or adjust. "Come May [when the ruling theoretically becomes law], people are going to be in their HR manager's office the next day—if not that afternoon—saying, 'I'm married, here's my license, and I want my benefits,'" says Andrew D. Sherman, senior vice president at The Segal Co., an employee-benefits consultancy based in New York.
While the decision will initially affect only Massachusetts workers, it is expected to have an impact well beyond state borders as similar cases head to court. (One such suit is pending in New Jersey.) And although companies aren't legally obliged to offer benefits that are required in one state to employees in every state, in practice they often aim to provide consistent treatment to all.
For employees, the difference between spousal and domestic-partner status is significant: employees pay income tax on the imputed value of benefits provided to domestic partners; they do not pay additional income tax on the value of employer-provided benefits for spouses. Moreover, domestic-partner coverage is often limited to health care, while married couples may also receive coverage for children, maternity and paternity leave, bereavement leave, and sick leave to care for a spouse, not to mention survivor benefits such as ongoing pension payments or disbursement from a profit-sharing plan, proceeds under a life-insurance policy, and unpaid wages in the event of a spouse's death.
For employers, the financial impact of providing spousal coverage to married gay couples will depend on the structure of their benefits plans. "In the simplest sense, if you think of employee policies, anywhere it mentions the term spouse, it's going to also include the same-sex spouse," says Alfred A. Gray, an attorney with Greenberg Traurig LLP in Boston, who specializes in labor and employment law.
"There absolutely will be a difference in cost," he adds, especially with HMO costs expected to rise almost 14 percent in 2004, according to a study by The Segal Co. Overall, however, the price may not be as high as some have feared. Thus far, companies that provide coverage for domestic partners have felt only a minimal impact. In 2000, a Hewitt Associates study found that domestic-partner benefits comprised less than 1 percent of benefit costs at 85 percent of responding companies. In part because each partner often receives benefits from his or her own employer, enrollment tends to be low—less than 1 percent of employees, according to the Hewitt study.
Marti Stubblefield, human-resources manager at Hellmuth, Obata + Kassabaum Inc., an architecture firm based in St. Louis ( 2002 revenues: $309 million), says that when the company expanded its benefits program to include domestic partners in 1998, "we anticipated 1 percent enrollment for same-sex partners only, so our actual enrollment of a little over 2 percent for both same and opposite-sex partners is in line with what we expected."
At Ascent Technology, a 35-employee Cambridge, Massachusetts, developer of information-management software for airlines, when an insurance company refuses to cover a domestic partner, Ascent pays the employee the cash differential. Despite this expense, Alan Hartstone, the company's finance chief, says he's seen "no noticeable difference in cost" since Ascent began offering domestic-partner benefits in 2002. And at IBM—which instituted domestic-partner benefits in 1996 after it bought Lotus Development, an early provider of partner benefits—spokesperson Jim Sinocchi says the program has not significantly increased the company's costs. About 600 IBM employees in the United States currently take advantage of the benefits.
Gay marriage is still far from a done deal. Many questions remain as states debate the definition of marriage and the federal government wrestles with its role in the issue. President Bush has said he could support a constitutional amendment limiting marriage to heterosexual unions, which would prohibit states from issuing marriage licenses to same-sex couples. However, Bush has also said the decision should be left to the states, "unless judicial rulings undermine the sanctity of marriage."
Under the federal Defense of Marriage Act, benefits such as pensions are not subject to new state laws, and states may not be required to recognize out-of-state gay marriages, says Malcolm Hindin, a partner at Palmer & Dodge LLP in Boston. This means that couples who marry in Massachusetts but work elsewhere may not be eligible for spousal coverage. These are issues that will need to be resolved by the courts. For tax purposes, the IRS will likely continue to treat members of same-sex couples as single, taxing the benefits provided to the dependent partner, even if he or she is a Massachusetts resident. "We're advising clients to continue to impute income for benefits provided to a same-gender spouse," says The Segal Co.'s Sherman.
The Bottom Line
Despite the uncertainties about the Massachusetts ruling and gay marriage in general, experts suggest that companies examine their existing benefits plans and run a variety of scenarios to calculate the cost of providing different levels of benefits to different groups.
"This is probably just the beginning," says Gray of Greenberg Traurig. "Other states are probably going to be compelled to deal with this one way or another."
Kate O'Sullivan is staff writer at CFO.
On January 12, New Jersey became the fifth state to recognize same-sex domestic partnerships. Gov. James McGreevey signed the state's Domestic Partnership Act into law after it passed the state senate with strong support, at 23 votes to 9. Although the bill does not authorize gay marriage, it extends a host of benefits to qualifying domestic partners, including hospital visitation rights and joint tax status. The state will not require employers to provide health benefits to domestic partners, but health-insurance providers must offer the coverage. State employees' domestic partners will receive retirement and health benefits, and New Jersey will also now recognize domestic partnerships from other states.
To qualify for the benefits, partners must share a common residence and show evidence of financial interdependence. Couples may be the same sex or of the opposite sex, but opposite-sex couples qualify only if they are older than 62, when the potential reduction in retirement benefits may act as a financial deterrent to marriage.
Immediately following the November ruling on gay marriage by the Massachusetts Supreme Judicial Court, both the state's governor, Mitt Romney, and Speaker of the House Thomas Finneran were searching for a compromise on civil unions that would stop short of marriage. The state senate asked the court for clarification, requesting an advisory opinion on whether legislating civil unions for same-sex couples would satisfy the terms of the ruling, but the court responded in February by rejecting the idea. Legislators were scheduled to meet later in February to discuss a proposed amendment to the state constitution that, like the 1996 federal Defense of Marriage Act, defines marriage as a union between one man and one woman. The amendment could not become part of the constitution until 2006. "The court, in essence, has given the legislature the opportunity to do something before the ruling is to become effective," says Alfred A. Gray, an attorney with Greenberg Traurig LLP in Boston. Ultimately, if lawmakers do nothing before the May deadline, the court will mandate the issuance of marriage licenses to gay applicants.