Miami Beach Over-Reaction

Lambda Legal says Clinton IRS rulings protect domestic partner benefits

The action by employee benefits fund administrators in Miami Beach terminating domestic partnership health benefits for police and firefighters contradicts Internal Revenue Service Private Letter Rulings issued during the Clinton administration in 1998 and 2000. Miami Beach’s move was apparently motivated by two more recent Private Letter Rulings issued last June that are not clearly on point.

The Clinton-era rulings, which have never been formally rescinded or supplanted by newer ones, responded to requests for advice by municipal employers concerned about the tax status of their insurance programs in light of the passage of the federal Defense of Marriage Act in 1996. DOMA provides that only the union of one man and one woman can be treated as a marriage for all purposes of federal law.

Jon Davidson, legal director at Lambda Legal, contacted Gay City News in response to our story last week about the benefits revocation, pointing out that the two Clinton-era Private Letter Rulings specifically provide that an employee benefit fund that pays out no more than three percent of its annual benefits to persons who are not legal spouses or dependents of employees would be in compliance with federal tax regulations governing such plans, and their privileged tax-exempt status would not be in danger.

The January 2006 letter in which the benefits fund administrators informed Miami Beach officials that they were terminating the benefits, on the advice of their accountant, referred ambiguously to letter rulings by the IRS suggesting a danger to the funds’ tax-exempt status. The only recent IRS rulings related to this subject, as reported last week, are two issued last June to government employers in California seeking advice about the tax status of their deferred compensation plans, a kind of pension savings plan.

In responding to those advice requests, the IRS noted that under California law domestic partners are supposed to be treated the same as legal spouses, and advised that an interpretation of the deferred compensation plan applied in a way inconsistent with DOMA would not be in compliance with the tax code. The IRS response was in itself ambiguous, since it did not spell out in so many words whether covering employees’ domestic partners under a municipal deferred compensation fund would ultimately be deemed “inconsistent” with DOMA by the IRS, much less by the federal courts that would have the final say.

If the Miami Beach fund accountant was relying on these letter rulings, that interpretation is highly questionable, because the tax code provisions dealing with deferred compensation funds are different from those addressing employee benefit plans, including those covering insurance. The IRS has not questioned the tax-exempt status of any employee benefits plan providing domestic partnership benefits, even though such plans have been in existence for more than a decade in many workplaces.

Lambda Legal, which monitors the situation closely, was unaware of any IRS Private Letter Rulings on domestic partnership insurance plans that could support the accountant’s advice. Both before and after the passage of DOMA, IRS private rulings have consistently advised that such plans will not lose their tax-exempt status. Referring to the two Clinton-era rulings, Davidson said, “We have done a thorough search of the IRS Private Letter Rulings and other documents and have consulted with tax experts, and there is nothing that indicates these two Private Letter Rulings do not reflect the current position of the IRS.”

It is possible that the Miami Beach Fund accountant was concerned that too much of the benefit payout in the most recent fund year went to non-dependent domestic partners of employees, but the letter communicating the revocation decision to city officials does not raise that issue, merely asserting generally that the existence of the benefits endangers the tax-exempt status of the plans. Statistics about experience under municipal domestic partnership plans show that it is highly unlikely that the three percent threshold mentioned in the letter rulings would be exceeded, so it would be surprising if that were the case in Miami Beach.