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Same-Sex Marriage - Employee Benefits and Taxation

What You Need to Know About: Same-sex Marriage

On 6/24/2011, Governor Andrew M. Cuomo signed into law the New York state Same-sex Marriage bill making New York state the largest state to recognize same-sex marriages. Effective on 7/24/2011, same-sex partners residing in New York could legally marry. The news of this new state law created extensive media attention; however, very little attention was given to the complexities involved with this law in regards to employee benefits and taxation.

1.       How many states recognize same-sex marriages?

In 2004, Massachusetts became the first state to allow same-sex marriages. With the addition of New York, there are now 6 states plus the District of Columbia who have state laws recognizing same-sex marriages. These states are Connecticut, Iowa, Massachusetts, New Hampshire, New York and Vermont. California, at one time, had a state law recognizing same-sex marriage but it was repealed on 11/4/2008.

2.       Does the federal government recognize same-sex marriages?

No, and that is what adds to the complexity. Passed in 1996 and signed into law by President Clinton, the federal government follows the Defense of Marriage Act (DOMA) which clearly defines “marriage” as “a union between one man and one woman” and “spouse” as being “a member of the opposite sex”.
As a result, any federal law or act such as the Employee Retirement and Income Security Act (ERISA), Consolidated Omnibus Budget Reconciliation Act (COBRA), Family Medical Leave Act (FMLA) and any Internal Revenue Service (IRS) code or regulation will follow DOMA and not recognize a same-sex partner as a legal spouse regardless of whether the state they reside in does.

3.       So do I have to allow same-sex spouses to participate in my health plan?

Is your health plan a fully-insured health plan or a self-insured ERISA plan? Just like with any other state law, if your health plan is fully-insured, you are subject to the state laws. As a self-insured ERISA plan, you are not required to comply with state laws.

This contributes to the level of complexity as many employers may self-insure their medical and drug plans, but, fully-insure a dental and/or vision plan. Some employers may find that they can prohibit the same-sex spouse from participating in the self-insured medical/drug plan but will be adding the same-sex spouse to the dental and/or vision plan.

4.       Do I have to offer a same-sex spouse COBRA?

Well, COBRA does follow the DOMA definition of marriage; however, federal laws tend to establish minimum requirements. Plan sponsors do have the option to provide a higher level of benefit provided it is consistently applied to all “similarly situated individuals”.

So, for example, a plan sponsor with a fully-insured medical/drug plan would be required to provide coverage to a same-sex spouse.   If the same-sex spouse has a COBRA Qualifying Event, it could be argued that the plan sponsor is not required to extend COBRA coverage to the same-sex spouse. However, this policy might not be prudent for a number of reasons.

A plan sponsor should discuss these scenarios with their insurance carrier and/or COBRA administrator to document a clear understanding of the administrative procedures that will be applied.

5.       Do I have to offer a special enrollment period for same-sex spouses?

You should address this topic with your insurance carrier or third party administrator. The IRS Section 125 rules allow for mid-year election changes due to marriage. However, remember that the IRS follows DOMA and does not recognize same-sex marriages. For this reason, it might not be possible for the same-sex spouse to be enrolled into the plan until the next open enrollment period.

6.       If the IRS does not recognize same-sex marriages, what are the tax implications?

This is an important question for your tax advisor and/or payroll administrator. If you sponsor a Section 125 plan, the employee can make pre-tax contributions to the cost of coverage. For an employee who enrolls his same-sex spouse during an open enrollment period and now has Two-Party coverage instead of Individual coverage, what amount of his contribution will be pre-tax? The IRS does not recognize the same-sex partner as a “spouse” and does not allow the same tax benefits that are automatically provided to an opposite-sex spouse. You may need to develop procedures for imputing income on a federal and state level.

In July, 2011, the New York State Department of Taxation and Finance issued guidance for employers on how to withhold taxes on the state level, for same-sex spouses for wages that are taxable on the federal level. If you have employees residing in New York state, you should refer to that guidance.

7.       What about any children from a same-sex marriage?

That is a question you may want to address with your legal counsel and whether the child should qualify for coverage and possibly favorable tax treatment as a legal dependent of the employee.

In many cases, self-insured plan sponsors are choosing to prohibit the same-sex spouse from enrolling in the plan, but, are allowing any children from the same-sex marriage to participate.

8.       What about common-law marriages between opposite-sex spouses? Are any of these issues applicable?

Not directly, but, it is a good idea while analyzing your plan’s rules and definitions on same-sex marriages to also review those rules and definitions for common-law marriages.

Currently, there are 11 states plus the District of Columbia who allow common-law marriages. These states are Alabama, Colorado, Iowa, Kansas, Montana, New Hampshire, Oklahoma, Rhode Island, South Carolina, Texas and Utah. Pennsylvania did recognize common-law marriage until 1/1/2005.
Typically, a common-law marriage entered into these states will also meet the DOMA definition and all federal laws and acts will recognize the union as a marriage. However, Iowa and New Hampshire recognize both same-sex and common-law marriages so it may be possible you could have an employee in one of those states wanting to enroll his same-sex, common-law spouse.

What do I need to do now?

• Determine what employee benefit programs you offer are subject to same-sex marriage and common-law marriage state laws.
• Review all of your plan documents such as your Section 125 document, Summary Plan Description, and any other document that addressed plan eligibility and definitions of “spouse” and “dependent” and whether they are in compliance with the state laws and/or clearly define your plan’s intent as to who meets the definitions.
• Discuss administrative procedures with all of your insurance carriers, third party administrators, payroll administrator, etc., to develop processes and ensure compliance.
• Review your plan’s communication materials to ensure the message is clear and not subject to misinterpretation.

We will continue to update you as additional guidance is released. In the interim, if you have any questions on this or any other state/federal law or regulation, please contact a member of your Banyan Consulting team.