What Employers Need to Know About the Effects of Same-Sex Marriage on Employee Benefits
Aug 31, 2015
Now that the Supreme Court of the United States has declared that all states must recognize marriages between same-sex couples, many employers have questions about what changes, if any, need to be made for employee benefit health plans. Many employees are also concerned about how their health benefits will be handled.
Background: The Evolution of Same-Sex Marriage Laws
On June 26, 2015, in Obergefell v. Hodges, the Supreme Court ruled that state bans on same-sex marriage violate the Fourteenth Amendment of the U.S. Constitution. As a result, all state laws must now allow same-sex couples to marry and recognize same-sex marriages legally performed in other states. Because ongoing monitoring of various state marriage laws is no longer critical for most employers and benefits professionals, this ruling simplified employee benefits plan administration related to same-sex marriage.
While this was a landmark case in the U.S., it is not one that happened overnight. Federal and state recognition of same-sex marriage has evolved over the past few years. In 1996, the Supreme Court of the United States enacted the Defense of Marriage Act (DOMA). This made it federal law that marriage is the legal union between one man and one woman. As a result, an individual who was a same-sex spouse resulting from a marriage in a state that legally recognized same-sex marriage was not considered a “spouse” under federal law. This meant that a couple who was legally married in one state, still wasn’t considered married under the tax code, for healthcare benefits or in regard to laws such as ERISA, COBRA, HIPAA and FMLA.
Then, in 2013, the U. S. Supreme Court ruled in US v. Windsor that DOMA was unconstitutional in limiting federal recognition of marriage to opposite-sex spouses. As a result, all same-sex marriages were recognized federally for all purposes, including the federal tax code and benefits laws and regulations. This ruling resulted in wide-spread impact on the treatment of employer-sponsored plans under federal law - including, but not limited to, pre-tax treatment of employer and employee benefit plan contributions (including federal income tax withholding and FICA), flexible spending account and health spending account eligibility, COBRA, retirement plan beneficiary designations, and death benefits. Many companies were required to modify their employee benefit plans to extend coverage to same-sex spouses.
While Windsor required federal law to recognize same-sex marriages performed under state laws, it did not obligate states to allow same-sex marriages or recognize same-sex marriages performed in other states. As a result, many states chose not to lift their ban on same-sex marriage at the time. This meant that companies with employees in multiple states were now required to monitor which states allowed same-sex marriage in order to ensure that their benefit plans were compliant with state laws.
After Windsor, federal taxes were no longer required to be paid on the imputed value of health coverage provided to an employee’s same-sex spouse. The same was also true of state taxes. However, this applied only in states that, at the time, recognized same-sex marriages.
State vs. Federal Laws
The most significant changes coming from the Obergefell ruling involve the taxation of health benefits for same-sex spouses in states that had not previously recognized same-sex marriages. In addition to providing coverage to same-sex spouses, employers should be mindful of the state and federal tax treatment that applies to premiums.
Taxation of Employer Contributions toward Coverage
After Obergefell, health benefits provided to an employee’s same-sex spouse are no longer subject to state taxes in any state. Employers in states that had previously not recognized same-sex marriages and that had been imputing state taxes to same-sex spouses’ health coverage should now treat these benefits as non-taxable. It should be noted that non-married domestic partners - whether same-sex or opposite-sex - if covered under an employer’s plan, are still subject to both federal and state taxes on their coverage unless they qualify as IRC Section 152 tax dependents.
Recognition of Same-Sex Marriage as a Qualifying Event
As with opposite-sex spouses, employees who have a same-sex marriage event are eligible for plan enrollment outside of the open enrollment period. Employees who currently do not have their same-sex spouse on their benefits coverage must experience a qualified life status change or wait until open enrollment to enroll their same-sex spouse on their coverage. It’s also worth noting that the Obergefell decision is, generally, not a life-status change event that allows an employee to newly enroll an existing same-sex spouse in a company’s group plan (but an exception could possibly apply for employees in a state where the group plan previously excluded same-sex spouses from being covered).
Tax Treatment Changes
If an employee is residing in a state that had not previously recognized same-sex spouses and has a same-sex spouse currently enrolled on their benefits, the company should now adjust the tax treatment for the portion of the premium attributable to the same-sex spouse. Benefit premiums, including the company contribution and employee payroll deductions, are no longer subject to state taxation.
Because there is no legal distinction between same-sex and opposite-sex marriages, TriNet recommends that companies require the same documentation (if any) for same-sex spouses as for opposite-sex spouses. Items that benefits professionals should review and have on-hand to ensure that company plans are in compliance include:
· Plan Document and Summary Plan Description: Do your documents address the federal and state tax treatment of company contributions and employee payroll deductions attributable to same-sex spouses? If so, this information may need to be amended to include all same-sex spouses and eligible children.
· Insurance Carrier Certificates of Coverage: If your benefit plan is fully insured, review the certificate of coverage to ensure that the insurance carrier’s definition of eligibility includes both opposite-sex and same-sex spouses. This is particularly important if your plan is issued in a state that previously did not allow or recognize same-sex marriages.
· Employee Enrollment Materials and Communications: If any amendments to your benefit plans were required, you will need to review and revise all employee communications, including enrollment forms, internal documentation and websites.
· Payroll System Updates: You may need to update your payroll system to apply both federal and state pre-tax treatment of health plan premium deductions and company contributions. If you use a third party payroll provider, request verification that its system has been updated.
· Retirement Plan Considerations: Do not forget about your company retirement plans! Following the Windsor decision, non-spouse beneficiary designations now require the same-sex spouse’s consent and the defined default beneficiary under the plan terms should be the spouse, regardless of gender. In addition, same-sex spouses now have spousal rollover rights and are an eligible payee under a qualified domestic relations order.
· FMLA Policy: If your company is subject to FMLA, review and update your FMLA communications, policies and procedures to expand eligibility to same-sex spouses. You’ll also want to review whether state leave laws apply to your company’s employees and if eligibility rules and leave rights differ from FMLA.
Considering the relevance and complexity of these changes, TriNet also suggests training your benefit and human resources teams to ensure they are aware of these changes and are communicating accurate information to your employees.
This communication is for informational purposes only; is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.
About the Author
Sheryl Southwick has over 20 years of experience in retirement and benefits, helping ensure that companies are in compliance with state and federal laws and regulations. As executive director of compliance at TriNet, Sheryl helps SMBs navigate the complex issues of compliance. She can be reached at Sheryl.Southwick@trinet.com.