Contractors with the State of California Must Offer Equal Benefits to Same-Sex Spouses

by Michelle L. Schuller

On September 6, 2011, Governor Jerry Brown signed legislation that will prevent the State of California from entering into contracts of $100,000 or more with businesses that do not provide equal benefits to same-sex spouses of their employees. Referred to as the Equal Benefits bill, Senate Bill 117 ("SB 117") is effective immediately and will require state contractors to provide the same type and level of benefits to same-sex spouses and same-sex registered domestic partners of employees as those provided to different-sex registered domestic partners and different-sex spouses.

SB 117 is an amendment to Assembly Bill 17 ("AB 17"), Section 10295.3 of the Public Contract Code, which passed in 2003 under Governor Gray Davis. For a full discussion of AB 17, please refer to our article California State Contractors Required to Provide Domestic Partner Benefits , published in our November 2003 issue. The enactment of AB 17 made California the first state to prohibit state agencies from entering into a contract of $100,000 or more with businesses that discriminated with respect to benefits between an employee with a different-sex spouse and an employee with a same- or different-sex registered domestic partner, as defined under California Family Code Section 297. Currently, Los Angeles, Sacramento, Oakland, Berkeley, San Mateo County, San Diego and Santa Monica have similar ordinances.

SB 117 mirrors AB 17, except for SB 117's expansion to cover same-sex spouses. The following provides a summary of the key provisions of the law.

Contracts and Benefits Impacted
This law covers current and prospective contracts for goods or services of $100,000 or more per contractor in a fiscal year. This legislation applies only to those portions of the contractor's operations that are being performed:

• Within California

• On real property outside of California if the property is owned by California, if California has the right to occupy the property, or if the contractor's presence on the property is connected to the contract with California

• Elsewhere in the United States where work related to the contract with California is being performed

Also, it is important to note that this law relates to any benefit that an employer offers to an employee's registered domestic partner or same-sex spouse. Typically, this would include health and welfare benefits, but may also include death or other benefits payable through a retirement plan that are not subject to the definition of marriage under the federal Defense of Marriage Act ("DOMA").

How to Comply
As was true under AB 17, state contractors may comply with SB 117 by taking any of the following steps:

• Electing to provide the same benefits to employees and their same-sex registered domestic partners and spouses as those provided to employees and their different-sex registered domestic partners and spouses

• Electing to provide the same benefits to individuals that are provided to employees' same-sex or different-sex spouses and employees' same-sex or different-sex registered domestic partners

• Electing to provide benefits on a basis unrelated to an employee's marital status or registered domestic partnership status, including, but not limited to, allowing each employee to designate a legally domiciled member of the employee's household as being eligible for benefits

• Electing not to provide benefits to employees based on their marital status or registered domestic partnership status, or electing not to provide benefits to employees' spouses or employees' registered domestic partners

• Whenever there is only one prospective contractor willing to enter into a specific contract with the state agency

• If the contract is necessary to respond to an emergency, as determined by the state agency, that endangers the public health, welfare or safety, or the contract is necessary for the provision of essential services, and no entity that complies with the requirements of SB 117 is immediately available to respond to the emergency

• Where the provisions of SB 117 violate or are inconsistent with terms or conditions of a grant, subvention, or agreement, provided the state agency has made a good faith attempt to change the terms or conditions of such grant, subvention or agreement to allow for compliance with SB 117

• Where the contractor is providing, conveying or transmitting wholesale or bulk water, power or natural gas or related ancillary services

In addition, where a state contractor is providing benefits to employees with same-sex and different-sex spouses alike, the contractor will not be considered in violation of this law in any of the following circumstances:

• There is a difference in cost to provide certain benefits to a registered domestic partner or a spouse, and the contractor permits the employee to pay any excess costs

• The contractor pays the actual costs incurred in obtaining the benefit

• The contractor is unable to provide a benefit, despite taking reasonable measures to do so

Penalties
Every state contractor subject to the provisions of SB 117 is required to certify that it is in compliance with the law. In the event a state contractor falsely certifies that it is in compliance with the provisions of SB 117, the contractor will be subject to the remedies and/or penalties contained in Public Contract Code § 10420 et seq. including voidance of the contract, damages imposed by a state court, and/or liability for a criminal misdemeanor or felony. These penalties may be avoided if the state contractor provides proof that it has complied or is in the process of complying with SB 117.

Next Steps
If you currently hold a contract with the State of California for goods or services, or regularly contract with the state, you and your plan advisor should review your benefit plans to determine whether they provide equal benefits to samesex and different-sex registered domestic partners and spouses. This determination is not a simple one due to the interplay of California's definition of marriage, which includes same-sex spouses, and the definition under the DOMA, which is limited to only a legal union between one man and one woman.

These dueling definitions have the biggest impact on qualified retirement plans, especially defined benefit plans, qualified under Section 401(a) of the Internal Revenue Code, because they contain more provisions that are governed by DOMA's definitions of "marriage" and "spouse." For instance, defined benefit pension plans are required to pay a DOMA-defined "married" participant's retirement benefit in the form of a qualified joint and survivor annuity ("QJSA") unless the participant elects another payment form and the participant's spouse consents to that election. Because under DOMA a plan cannot treat a participant in a same-sex marriage or a registered domestic partnership as "married" for purposes of the QJSA rules, in order to satisfy the requirements of SB 117 California state contractors must offer an optional joint and survivor annuity to that participant on the same terms as if he or she were in an opposite-sex marriage. In addition, defined benefit pension plans are required to provide the surviving spouse of a married participant with a qualified pre-retirement survivor annuity ("QPSA"). Therefore, to satisfy SB 117, California state contractors with a defined benefit plan must provide the surviving same-sex spouse or registered domestic partner with a pre-retirement survivor annuity similar to a QPSA.

Health and welfare plans, on the other hand, are only minimally affected by SB 117, because providing equal benefits to same-sex spouses presents basically the same issues as providing benefits to registered domestic partners. Employers are not generally required to offer health coverage to employees or their spouses or registered domestic partners. If such benefits are offered to an employee's spouse, however, California state contractors must offer the same health coverage to both same-sex and different-sex spouses and registered domestic partners to comply with SB 117. Contractors with insured plans should confirm that the insurance policy will cover samesex spouses (as required in California). Insurance policies based in states other than California may define spouse to include only opposite-sex spouses. If this is the case, the contractor may need to ensure that the same-sex spouses and registered domestic partners may be covered under the carrier's definition of a domestic partner (if they have one) or find a new insurance carrier.

Where there are discrepancies between benefits provided to same-sex and different-sex spouses and registered domestic partners, you will need to amend your plans by adjusting benefits where possible or necessary to comply with SB 117. Also, contractors with collectively bargained multiemployer plans will need to assess whether any modification to their benefits will require approval by the union and/or the plan's board of trustees. Any plan amendments must be timely communicated to participants via a new Summary Plan Description or a Summary of Material Modifications. If you currently or regularly contract with the state of California, please feel free to contact us to determine if SB 117 impacts your benefit plans and, if so, how to comply.

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