• Dates for submission of IRS determination letter requests for governmental plans.
• Benefits of submitting an IRS determination letter request.
• Scope of an IRS determination letter for a governmental plan.
• Common issues found in IRS determination letter requests by governmental plans.

In many instances, domestic partner policies were originally adopted based on a perception that employees with same-sex partners were disadvantaged relative to those with opposite-sex partners, due to the fact that same-sex marriage was not recognized under applicable state law. In most instances, the policies apply only to same-sex partners, although in some they are also available to unmarried opposite-sex partners. The question therefore becomes whether to eliminate these policies as same-sex marriage becomes available. Some factors to consider are set forth below.

Arguments for Eliminating Domestic Partner Policies

1. Administrative complexity

A marriage is typically easy to document. Governmental agencies maintain copies of marriage certificates. A marriage can be ended only on divorce or death, either of which is also documented by a government agency. Thus, it is typically possible to determine with certainty whether an employee is or is not married. (Of course, this may be more of an issue in instances in which a common law marriage is a possibility, but these represent a small fraction of marriages.)

By contrast, except in those states with registered domestic partnerships, the existence of a domestic partnership can be much harder to document. Typically, an employee must file an affidavit with the employer to establish a domestic partnership as a precondition for benefits. However, if there is no formal divorce-type filing, it can be difficult to determine whether or when a domestic partnership ends. Indeed, there could be instances in which an employee marries without ever formally ending a domestic partnership. (Bigamy laws would, of course, apply to an employee who remarried without ending a prior marriage, but those laws do not apply to domestic partnerships.)

2. Equal protection issues

One of the concerns in Maryland was that the state could face lawsuits from opposite-sex couples denied the opportunity to obtain benefits as domestic partners. After all, if same-sex couples can get benefits without marriage, why should opposite-sex couples be denied the same right?

Arguments Against Eliminating Domestic Partner Policies

1. Domestic partner policies fulfilling other goals

In some instances, domestic partner policies already cover opposite-sex as well as same-sex couples. For example, some employers have wanted to protect senior citizens reluctant to marry due to the effect on Social Security benefits. These reasons may continue to exist even after passage of marriage equality.

2. Inconsistent state laws

An employer in Maryland, for example, may have employees who are domiciled in Virginia. While Maryland recognizes same-sex marriage, Virginia does not. If the employer eliminates recognition of domestic partnerships, employees domiciled in Virginia may lose benefits.

Moreover, the determination of whether an opposite-sex couple is married is typically determined under the law of their state of domicile at the time they get married. And in the vast majority of instances, a state will recognize a marriage of an opposite-sex couple performed in another state, even if the marriage would be impermissible under the laws of the state of domicile. Thus, if an opposite-sex couple lives in Virginia but gets married in Maryland, it is generally safe to assume that the couple has a valid marriage.

The law applicable to same-sex couples is much less clear. Section 2 of the federal Defense of marriage Act provides as follows:


No State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship.1

For example, if a same-sex couple domiciled in Virginia gets married in Maryland, Virginia will not recognize the marriage. Should Maryland nevertheless recognize the marriage for benefits purposes?

Even more complicated questions arise due to the mobility of employees. Suppose that a same-sex couple is domiciled in Maryland, and gets married there, but then moves to Virginia. It is clear that Maryland would have recognized the couple as validly married before the move. Should the move be treated as the equivalent of a divorce for benefits purposes?

3. Fairness issues

Even in states that recognize same-sex marriage, the panoply of rights and obligations available to married same-sex couples is very different from those available to married opposite-sex couples. To begin with, same-sex marriage involves a much higher level of commitment. An opposite-sex couple knows that divorce will be available. However, divorce is governed by the couple’s state of domicile at the time of the divorce. Thus, for example, suppose that a couple gets married while living in Maryland, but then retires to Florida. At that point, they could never get a divorce unless at least one of them moved to a state that recognized same-sex marriage.

In addition, Section 3 of the Defense of Marriage Act precludes federal recognition of same-sex marriage.2 Thus, marriage involves a greater commitment for same-sex couples, while securing them fewer rights. To the extent that the impetus for abolition of domestic partner benefits is fairness vis a vis opposite-sex couples, consideration needs to be given to the extent that requiring marriage as a condition for benefits in fact constitutes an equal requirement for same-sex and opposite-sex couples.

Timing Issues

For an employer that decides to abolish domestic partner benefits, another issue is timing. Should the change apply only to new employees, or to those who have not yet established domestic partnerships? Or should it apply even to those who already have domestic partner benefits?

To the extent that domestic partnership policies apply to retirement plans, governmental employers may be precluded by state Constitutional provisions from taking those benefits away from current employees, or at least from those current employees already in domestic partnerships.

Another issue to consider is what happens to those individuals already receiving benefits as domestic partners if such benefits end. Will they receive a COBRA-type ability to elect to continue benefits at their own expense? (COBRA itself, being a federal statute, typically does not apply to benefits to domestic partners.) How long will it take them to secure other coverage?

And for those employees who do choose to get married, how fast is it reasonable to expect them to do so? The average length of an engagement is 13-18 months. For a couple that has never been legally able to get married, is it reasonable to expect them to make the decision to marry, and plan the wedding, within a few months?

Federal Securities Law

One alternative is mentioned in the article. In some instances, the SEC has required money managers utilizing “secret agents” as marketers to offer public pension investors return of principal invested plus all fees paid. However, this alternative penalizes only those who received kickbacks, not those who agreed to pay them.

Federal Tax Law

Federal tax law contains two restrictions on kickbacks by a qualified retirement plan:

• Under Internal Revenue Code (Code) section 401(a)(2), a plan can be qualified only if:
  

  it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries…

• Under Code section 503(a)(1)(B), a governmental plan will cease to be exempt from tax under section 501(a) if it engages in certain “prohibited transactions.” Under Code section 503(b)(2), paying “any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered,” to certain parties related to the trust is a prohibited transaction.

With regard to section 503(b), an initial hurdle would be showing that the persons receiving kickbacks were parties related to the trust. A more serious difficulty with using federal tax law in these circumstances is that it may impose a penalty on the very employees who were hurt by the original kickbacks. In the case of a private employer, disqualification of a retirement plan harms the employer (because it loses tax deductions for contributions to the plan trust), the trust itself (because it becomes taxable), and the employees (because they become taxable on vested contributions to the trust, and lose the ability to roll over distributions from the trust). However, the first two of these issues do not apply to public retirement systems. The employer (being nontaxable) is not concerned about deductions. Under News Release IR-1869 (August 10, 1977), a plan that ceases to be qualified or otherwise loses its tax-exempt status under section 501(a) is nevertheless tax-exempt due to its governmental status. Thus, the only adverse consequences of disqualification/loss of 501(a) status fall on the employees.

State Law

In general, state laws provide the greatest protections for employees, and the greatest possibility of sanctions for fiduciaries. They act in two ways:

• Governmental entities are typically responsible for ensuring that promised pensions are paid, regardless of sufficient assets are available in the pension plan to pay them. This contrasts with the situation of corporate pension funds, in which the employer’s liability for previously promised pension costs may be limited if:
  • the employer is facing liquidation under bankruptcy proceedings,
  • the costs of continuing the plan will cause the business to fail, or
  • the costs of continuing the plan have become unreasonably burdensome solely because of a decline in the employer’s workforce.
• State fiduciary laws may impose liability on fiduciaries for misconduct. Where available, this provides one of the few mechanisms for directly imposing liability on those responsible for the situation.

• contributions made to the plan are the employer’s “pick-up contributions” (i.e., pretax employee contributions under section 414(h)(2) of the Internal Revenue Code), or
• the plan has a qualified governmental excess benefit arrangement (i.e., a separate trust that provides only a participant’s annual benefit in excess of the limits under Internal Revenue Code section 415).

Sponsors may, however, apply for a private letter ruling from the IRS for these matters. The IRS document linked above discusses the requirements for such rulings.

Use of a pension fund’s investments to further nonfinancial purposes, sometimes referred to as social investment or socially screened investment, has a long and controversial history. Previous examples have included divestment of stocks in South African companies during apartheid, and divestment of tobacco stocks. A discussion of the history and the legal issues involved can be found at this link.

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An exception in § 153.400(a)(1)(ii) from the reinsurance contribution requirement applies to health insurance coverage that is not part of an issuer’s commercial book of business. However, the regulations do not treat a governmental health plan as automatically being noncommercial. The relevant language is as follows:

[P]roducts offered by an issuer under Medicare Part C or D would be part of a “governmental” book of business, not a commercial book of business. Similarly, a plan or coverage offered by a Tribe to Tribal members and their spouses and dependents, and other persons of Indian descent closely affiliated with the Tribe in the capacity of the Tribal members as Tribal members (and not in their capacity as current or former employees of the Tribe or their dependents) would not be part of a commercial book of business. But a plan or coverage offered by the Federal government, a State government, or a Tribe to employees (or retirees or dependents) because of a current or former employment relationship would be part of a commercial book of business.

So, what is the transitional reinsurance fee? Essentially, it is a fee collected by the federal government and paid to insurance companies to ease their transition to providing health coverage to all, regardless of their health status. It is calculated based on the cost of providing certain subsidies to insurance companies for individuals with certain high risk health conditions, plus the administrative expense to the federal government for collecting and distributing the money. The amount will be $63 per enrollee for 2014, and will diminish each year until 2016. It will end after 2016.

Self-insured group health plans are excluded from receiving reinsurance payments. Nevertheless, the regulations conclude that there is no basis for lowering the fee for them or excluding them from the fee.

The fee is imposed at the plan level in the case of a self-insured plan. However, to the extent that the plan uses a third-party administrator (TPA), the plan can contract with the TPA to pay the fee.

It is unclear what the penalty would be for noncompliance in the case of a self-insured governmental plan. Private plans are subject to an excise tax for failure to comply. In the case of an insured governmental plan, the penalty would fall on the insurer. However, imposition of a tax on a governmental employer would raise Constitutional issues. The regulations do not discuss the penalty issue.