California Insurance Equality Act - Domestic Partner Coverage

Precept Legislative Update on AB 2208 and AB 254
By Christine P. Roberts, Esq.
Mullen & Henzell, LLP
Santa Barbara, California

The California Insurance Equality Act (AB 2208) is a new state law that requires California insurance providers and managed care plans (HMOs) to provide coverage for registered domestic partners that is equal to spousal coverage. The law complements California’s Domestic Partnership Rights and Responsibilities Act of 2003 (AB 205), which grants registered domestic partners most of the same rights and responsibilities under California law as belong to married couples.

Prior to AB 205 and AB 2208, domestic partners were viewed as non-spouse dependents for insurance coverage purposes. Gaining legal status equal to that of a spouse is important because spousal coverage may be available when coverage for other dependents is not. Spousal coverage is also automatically deductible for the individual employee, whereas coverage provided to a non-spouse dependent is deductible only if the dependent resides with the employee and receives more than half of his or her income from the employee, which may not be the case for many same-sex couples. More information on the taxable consequences of AB 2208 is set forth below.

Insurance Policies Impacted

In addition to medical insurance plans and HMOs, the Act applies to auto, rental, disability, life, and all other non-health related forms of insurance regulated by the California Department of Insurance. The Act does not apply to self-funded medical plans, only to fully insured arrangements.

Does the law require employers to provide coverage for registered domestic partners?

Not directly. The Act governs only California insurers and HMOs, and does not
expressly require employers to provide coverage for registered domestic partners. For practical purposes, however, employers will not be able to locate an insurance policy or HMO contract in California that does not automatically cover domestic partners along with spouses. Employers with self-funded medical plans will continue to be able to limit group health plan participation to legal spouses. In such instances, ERISA, the federal law governing employment benefit plans, would likely prevail over any state-level charges of discrimination.

Will proof of domestic partnership still be required? Who will collect it?

The Act requires that enrollment of domestic partners be on the same terms as enrollment of spouses, so if the HMO or insurer requires proof of domestic partnership status, or termination of the domestic partnership, it must also require proof of marital status (or legal separation/divorce). Again, since the Act applies to insurers and HMOs it will be their job, not the employer’s, to collect the necessary documentation from individual insureds.

What is required to register a domestic partnership in California?

The basic elements of a domestic partnership, as defined in Section 297 of the California Family Code, are: (1) the partners are unmarried; (2) share a common residence; (3) are not related by blood in any way that would prevent a legal marriage in California; (4) are capable of consenting; and (5) are both of the same gender, unless at least one of them is age 62 or older and qualifies for Social Security benefits. The Act only guarantees insurance coverage to domestic partners who meet these criteria and who have filed a valid Declaration of Domestic Partnership with the California Secretary of State. A declaration filed with a local agency of California, by another state, or a local agency of another state may be acceptable, but it is not clear that coverage will be available to partnerships that are defined more permissively than the state model. More information on registering domestic partnerships is available at the California Secretary of State's website at www.ss.ca.gov/dpregistry/index.htm.

Does the Act affect federal COBRA continuation coverage?

No. The Act specifically states that it is not to be construed as expanding COBRA continuation coverage rights under federal law. COBRA benefits are limited to the terminated employee, his or her spouse (as defined under federal law), and dependent children. Under the federal Defense of Marriage Act of 1996, the word "spouse" only refers to a person of the opposite sex who is a husband or wife. Therefore domestic partners may not make an independent election for COBRA coverage. A domestic partner may be part of an employee’s election if the employer voluntarily agrees to provide for such a benefit. If a registered domestic partner receives group coverage from an employer who is subject to federal COBRA, that individual will only be eligible for COBRA (and the Cal-COBRA extension) if the employer voluntarily provides federal COBRA coverage to registered domestic partners, as federal law does not recognize the legal status of domestic partners in the way that California law now does.

However, for employers with fewer than 20 employees, Cal-COBRA benefits that apply under state law will be expanded to include registered domestic partners as a result of AB 205. Registered domestic partners who qualify for Cal-COBRA benefits would also be eligible for extended Cal-COBRA coverage under California Assembly Bill 1401, which provides an additional 11 to 18 months of Cal-COBRA coverage to individuals who exhaust their federal COBRA or Cal-COBRA coverage.

Will HIPAA guaranteed issue coverage be available to Domestic Partners when COBRA is exhausted or unavailable?

Domestic partners are not recognized as dependents under federal law and therefore technically are not covered by HIPAA. For this reason, HIPAA conversion coverage may not be available to domestic partners. It would seem logical, however, that California insurers and HMOs that are obligated to provide coverage to registered domestic partners would provide HIPAA certificates of coverage to these individuals. Whether other HIPAA entitlements, including guaranteed issue coverage, will be available to domestic partners is an area of the new law that still needs to be further clarified.

Will the Act impact the taxation issues associated with domestic partner coverage?

Yes and no. At the federal level, the Defense of Marriage Act, mentioned above, means that registered domestic partners will still be treated as non-spouse dependents for federal tax purposes. For employees whose domestic partner does not meet the definition of a “tax code dependent,” any payroll contribution for domestic partner health coverage will be an after-tax deduction, and the employer cost of providing domestic partner coverage will be added to the employee’s taxable income on his/her W-2 at the end of the year. By contrast, for California personal income tax purposes, domestic partners are considered to be spouses for purposes of the Internal Revenue Code § 106(a) exclusion for employer provided health coverage.  (See California Revenue and Taxation Code Section 17021.7.) Therefore, benefits provided to a registered domestic partner are not included in gross income for state tax purposes.

When does the Act go into effect?

Governor Schwarzenegger signed the bill into law on September 13, 2004. The new law applies to group medical insurance policies and HMO plans that are issued, amended, delivered or renewed effective on or after January 2, 2005, which means many contracts will not be impacted until 2006. The Act does go into effect on January 1, 2005 for life, disability, renters and auto insurance.

What should employers do to get ready for compliance with the Act?

Insurance companies are still in the process of reviewing how the new law will impact their policy contracts and administration. Employers will need to have their broker review renewing and new group medical, HMO, disability, and life insurance contracts as soon as they are available to fully understand the law’s impact.

From a proactive standpoint, you may want to review the steps that will need to be taken within your organization to provide domestic partner coverage, including creating a formal policy. In doing so, you should keep in mind that insurance benefits will only be available to domestic partners who meet the fairly narrow criteria set out in Section 297 of the Family Code. Therefore, you may want to keep other employment policies and benefits consistent with this definition.

It is advised to conduct an overall review of all employment policies as they may impact domestic partners. In most cases, employers have found that extending insurance coverage and other fringe benefits to registered domestic partners does not add significantly to the costs of doing business, while helping to attract and retain good employees.

We will update you as final determinations are made regarding AB 2208. In the meantime, you can find additional details on the Act by visiting the California Department of Insurance at www.insurance.ca.gov, and the California Department of Managed Health Care at www.dmhc.ca.gov.

California Repeals Senior-COBRA (AB 254) In Favor of

“Guaranteed Issue” Coverage

On June 23, 2004, Governor Schwarzenegger signed into law Assembly Bill 254, which repeals, effective January 1, 2005, Senior COBRA provisions which allowed many California workers age 60 and over to maintain group medical coverage until they became entitled to Medicare.

What most people don’t understand about the repeal of Senior COBRA is that it is actually a benefit to seniors in California, allowing them to reduce their coverage rates by as much as 43% without loss of benefits.

In order to understand why this is the case, a bit of background information is helpful.

Current Law

The current Senior COBRA law provides former employees, their spouses, and former spouses to continue employer-sponsored group health coverage after their federal COBRA or Cal-COBRA benefits end. (Federal COBRA imposes continuation coverage rules on employers with 20 or more employees in the prior year, and Cal-COBRA applies to smaller employers.) To qualify for senior COBRA, a terminating employee must meet all of the following requirements:

  • Is age 60 or older when employment ends;
  • Has worked at least 5 continuous years with the same employer immediately preceding enrollment in COBRA or Cal-COBRA;
  • Is covered under a fully-insured health plan; and
  • Has exhausted federal COBRA and/or Cal-COBRA benefits.

The premium cost for Senior COBRA is capped at 213% of the regular premium paid for or by active employees for non-age rated coverage. However, the premium cost is 102% of age-rated coverage subject to federal COBRA, and 110% of age-rated coverage subject to Cal-COBRA.

Senior COBRA continues for five years, or until the earliest of the following events occurs:

  • The individual turns age 65 or otherwise becomes entitled to Medicare benefits;
  • The individual is covered by a group medical plan not sponsored by his or her former employer – such as coverage under a spouse’s plan; or
  • The employer terminates the group health plan in question.

The Introduction of HIPAA

The Senior COBRA system worked well for many years. Then, in 1996, Congress enacted the Health Insurance Portability and Accountability Act (“HIPAA”). Although HIPAA is now most closely associated with health privacy issues, the first wave of legislative change it introduced was benefits “portability” – provisions that allowed workers to maintain their group health coverage independently of their working situations. The “guaranteed issue” component of HIPAA requires insurers to offer coverage at competitive rates when someone’s COBRA rights to continue group health coverage is exhausted or unavailable. Most important, the coverage is available without regard to any preexisting medical conditions.

Many states, including California, opted under HIPAA to develop their own version of guaranteed issue coverage. The California version caps premiums for qualified individuals between the ages of 60 and 64 at 170% of the average group health premium for individuals who are 59 years of age and reside in the same geographic area. This represents a 43% savings over Senior COBRA rates. However, those people who are enrolled in Senior COBRA cannot convert to the cheaper guaranteed issue coverage, because they have not “exhausted” their Cal-COBRA benefits.

Put otherwise, in the current regime people who are eligible for Senior COBRA are, by definition, ineligible for cheaper coverage under California’s version of HIPAA’s guaranteed issue rules. AB 254 was introduced in order to remedy this unfair “Catch-22” for seniors in California.

The New Law

AB 254 simply removes Senior COBRA coverage for individuals who would otherwise qualify for it on or after January 1, 2005, thereby making less expensive guaranteed issue coverage available to them. Of course, these individuals must still exhaust their period of “normal” federal or California COBRA coverage (usually 18 months), before the guaranteed issue coverage is available, but this is a much shorter wait than the 5-year Senior COBRA period. Other eligibility rules apply to guaranteed issue coverage, including that individuals must elect their coverage within 63 days of termination of COBRA, Cal-COBRA, or end of employment if no COBRA is offered.


As of this writing, it appears that those people who are currently receiving Senior COBRA coverage, or who become eligible for it through December 31, 2004, will be required to enroll or stay enrolled in that program and will not be able to switch to a less expensive option under guaranteed issue coverage.


Employee Communications

In the current environment of rising health care costs, many employees who are approaching age 60 may be alarmed to hear about the repeal of Senior COBRA. As an employer, your first job will be to reassure them that Senior COBRA coverage was repealed in favor of more affordable coverage options under HIPAA. You might also remind them that the new law does not impact extended Cal-COBRA coverage benefits, which allow certain recipients of federal COBRA or Cal-COBRA to receive up to 18 months of additional continuation coverage after their initial period of federal COBRA or Cal-COBRA coverage end. The extended Cal-COBRA law means that many former employees in California can expect to receive 36 months of continuation coverage, albeit at their own expense.

Conclusion

The repeal of Senior COBRA provisions is good news for California employees nearing retirement age. However, careful communication is needed in order to help employees and former employees understand how this change in the law can work to their personal benefit in the form of significant premium savings over a five-year period

The above information is a brief summary of legal developments that is provided for general guidance only. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation.


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