Benefits issues and Same-sex Marriages
According to a California Supreme Court decision rendered on May 15, 2008, same-sex couples are able to enter into marriage, beginning June 16th. There is a possibility that this matter will come up for popular vote in the November elections in the State of California. California is the second state, Massachusetts being the first, to sanction same-sex marriages. Providing benefits to individuals in either same-sex marriages or domestic partnerships, whether mandated or voluntary, raises many benefit issues.
Generally, marriage is determined by state law. Although the federal Defense of Marriage Act (DOMA) defines marriages for many rights and privileges conferred by federal law, the federal DOMA does not, in all instances, mirror a state’s definition of marriage, particularly in states that recognize same-sex marriage.
Following is a brief discussion of some of the benefit-related issues that can arise with regard to differences in state and federal laws, and same-sex marriage, civil unions, and domestic partnerships:
The federal tax code provides many tax-favored benefits to employees and their qualified dependents, including qualifying children, qualifying relatives, and spouses. If a same-sex partner, whether through a domestic partnership or through marriage, does not meet the federal tax definition of a qualifying child, qualifying relative, or spouse, there can be no federal tax advantage for providing these benefits. However, there may be a state tax advantage in those states that recognize same-sex marriage, as well as in states that allow state tax advantage for individuals in a civil union or registered domestic partnership. If the same-sex individual does not meet the federal tax definition, the cost of providing the benefit, determined on a fair market value (FMV) cost of providing the benefit, such as health insurance, would be includible in the employee’s income. There is little guidance on how to determine FMV. The IRS and Treasury Department have indicated that FMV is determined by what it would cost to obtain the benefit in an arm’s length transaction.
The general thought is that, for health plan purposes, for example, using the COBRA rate, less the 2% administrative fee, would be a reasonable way to determine FMV. If there is one non-dependent, the single COBRA rate would be used; if there are multiple non-dependents, such as a domestic partner and the children of a domestic partner, the comparable family COBRA rate would be appropriate.
The employee’s share of providing benefits to the non-dependent must be paid on an after-tax basis. The recently issued proposed cafeteria plan regulations would allow the premium for the nondependent to be paid on a pre-tax basis, with the FMV of providing the benefit imputed into the employee’s income. The medical expenses of a nondependent cannot be reimbursed from a flexible medical spending account, a health reimbursement account, or a health savings account.
Other federal laws providing benefits to dependents and spouses include COBRA, HIPAA, including portability and special enrollment, and FMLA. The benefits available through these laws are not available to non-dependents. If an employer wishes to extend some or all of these benefits to non-dependents, the employer’s plan(s) would have to be amended, for example, to provide COBRA-like benefits, or to provide special enrollment opportunities.
States that recognize same-sex marriages, and states that recognize other kinds of same-sex unions, such as civil unions or registered domestic partnerships, may extend benefits, such as leave rights or continuation rights, to affected individuals. Employers will have to be able to discern when a federal right, such as a federal entitlement to FMLA leave, applies in which case the benefit is not extended to non-dependents, versus a state law, such as the California Family Rights Act which would be available to same-sex spouses in California or registered domestic partners.
This area of the law is very much in a state of evolution and flux. Employers must do their best to tackle a moving target.
The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.
As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.