last updated 10/21/2013
When the U.S. Supreme Court in U.S. v. Windsor overturned a key part of the Defense of Marriage Act (DOMA) in June 2013, it opened up new doors to same-sex married couples when it comes to employee benefits.
The decision struck down Section 3 of DOMA, which had limited the definition of “marriage” and “spouse” to opposite-sex unions, and made same-sex spouses eligible for the same privileges as opposite-sex spouses regarding federal laws and taxes. This, in turn, has tremendous implications for employee benefits.
Although there is still much more guidance to come on the benefit changes employers must make as a result of the ruling, the decision itself raises a new question: Is there still a need for domestic partner (DP) offerings for unmarried couples in a post-Windsor landscape?
The answer is, it depends.
For one thing, although many employers began offering DP benefits because same-sex couples had no option to marry, DP benefits now are often provided to unmarried opposite-sex couples as well.
In some industries and locations, DP benefits are a selling point for potential employees. “Continuing domestic partner benefits could be the right choice for employers, for example, in industries with very competitive talent markets, such as the technology industry,” said Steve Wojcik, vice president of public policy for the National Business Group on Health in Washington, D.C. “In addition to being a competitive market, these companies tend to have younger employee populations with whom domestic partner benefits might appeal.”
A post-Windsor survey of large U.S. corporations, conducted in August by the ERISA Industry Committee (ERIC), found that 87 percent of large U.S. employers offered benefits to same-sex partners and 55 percent made them available to opposite-sex partners. However, 29 percent said they would be making changes to same-sex DP benefits due to the Windsor decision, and 5 percent planned to alter benefits now provided to opposite-sex couples.
How Prevalent Are DP Benefits?
According to a report by the U.S. Bureau of Labor Statistics, 31 percent of workers in private industry overall had access to health care benefits for same-sex partners, and 26 percent had access to plans that provide health care benefits to opposite-sex partners, in March 2013, prior to the Windsor ruling. The Society for Human Resource Management’s 2013 Employee Benefits survey report, fielded in February, showed 24 percent of organizations offered same-sex DP benefits excluding health care, and 20 percent provided opposite-sex DP benefits excluding health care.
In perhaps the most significant sign that DP benefits are still relevant, Wal-Mart Stores Inc. announced in August 2013 that it would begin offering these benefits to its employees. Wal-Mart will provide benefits to a same-sex or opposite-sex domestic partner with whom the employee has been in an exclusive and ongoing relationship for at least a year.
The U.S. federal government is also exploring the idea of offering DP benefits to civilian employees, and legislation allowing the move has been introduced in the U.S. Senate.
However, the Defense Department announced in August it will extend benefits, including health insurance and base housing, only to same-sex spouses of U.S. troops and not to unmarried partners. Gay service members may be eligible for up to 10 days of “marriage leave” so they can travel to a state that legally recognizes same-sex marriage, under a new Pentagon policy.
States that fully recognized same-sex marriages (at the end of 2013): California, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, Vermont, Washington state, plus Washington, D.C.
In December 2013, Utah began recognizing same-sex marriages pursuant to a federal district court ruling, until such marriages were stayed by the U.S. Supreme Court in January 2014 pending a ruling by the 10th Circuit Court of Appeals.
Impact of Federal Regulations
In the wake of Windsor, the U.S. Department of the Treasury and the IRS ruled in August 2013 that same-sex couples who were legally married will be treated as married for federal tax purposes, including the pretax treatment of a spouse’s health insurance coverage, in all 50 states and the District of Columbia. Revenue Ruling 2013-17 applies, in other words, regardless of whether the couple now lives in a state that recognizes same-sex marriage or a state that does not recognize same-sex marriage.
The IRS followed up in September 2013 with Notice 2013-61, outlining administrative procedures through which employers can recover taxes they’ve paid on health premiums and other tax-exempt spousal benefits for married same-sex couples in 2013 and prior years. Taxes cannot be recovered on post-tax dollars spent on benefits for an unmarried domestic partner, however.
Similarly, in September the U.S. Department of Labor (DOL) issued Technical Release No. 2013-04, stating that henceforth it will interpret the Employee Retirement and Income Security Act (ERISA), which governs most employer-provided retirement and health plans, to include same-sex as well as opposite-sex spouses, regardless of the state in which they reside. Again, marriage is required.
In a September 2013 blog posting, Dale Carpenter, professor of civil rights and civil liberties law at the University of Minnesota, wrote:
“Consider that some states now recognizing same-sex marriages, like California, do not have residency requirements for getting validly married under state law. A Texas couple can fly to San Francisco in the morning, get married in the afternoon, and be back home in time for the reception, with ERISA protections at the Texas jobs.”
“There is also, it should be noted, an effect for unmarried gay couples currently getting benefits from private employers who have recognized domestic partnerships. ERISA covers only ‘spouses’ and will not be extended to domestic partners. Since federal benefits will now be available to same-sex spouses wherever they live, many companies across the country will likely end their domestic-partnership programs. Three decades of experimentation with alternative family statuses like civil unions and domestic partnerships is coming to an end.”
Yet there remain a host of state laws that can still impact employee benefits for same-sex couples in states that do not recognize same-sex marriage. “It is still vague about what the states have to do when it comes to employee benefits” and same-sex married couples, said Robyn Credico, defined contribution practice leader, North America, with Towers Watson in Washington, D.C. “The advantage of domestic partner benefits is that they cover any employee’s partner no matter their state of residence.” Depending on what happens at the state level, domestic partner benefits could prove to be an important backup for same-sex couples.
Imputed Income and Gross Ups
“It’s an open question: Will employers require marriage and eliminate domestic partner benefits entirely?,” noted Todd Solomon, a partner in the employee benefits practice group of McDermott Will & Emery LLP in its Chicago office.
In states that don’t recognize same-sex marriages (“nonrecognition states”), employers are still expected to impute income spent on benefits provided to a same-sex spouse for state tax purposes, but not to do so for federal tax purposes, Solomon explained, speaking at the 2013 EBN Benefits Forum and Expo in September. In states that do recognize same-sex marriages (“recognition states”) employers no longer need to impute this income for either federal or state taxes, but would have to do so for unmarried domestic partners.
“That could factor against maintaining domestic partner programs in recognition states, since limiting benefits to legally married couples would ease this administrative burden.”
Relatedly, many employers that extend health coverage to a same-sex partner or spouse have paid “gross ups”—extra income to compensate for the additional taxes the couple pays on the spouse’s or partner's post-tax health premiums. “Where gross ups have been paid, employers are beginning to require marriage—rendering the spousal benefit federally tax exempt and state-tax exempt in recognition states,” said Solomon. “When domestic partner programs are eliminated, the employer may provide a grace period of several months for the couple to marry.”
But for employers in nonrecognition states, an issue could be the expense of requiring employees to travel to the nearest recognition state to wed. Explained Solomon:
“If you're in Georgia, the nearest jurisdiction might be Washington, D.C., or Maryland. The expense for the trip could be considerable for those with low or moderate incomes. And afterward, their home state doesn’t recognize their marriage, so when the couple comes back to Georgia they have to file federal returns as a couple (either joint or married filing separately) but state tax returns as individuals.”
Not all same-sex couples want to handle this complexity, he noted.
In Calif., Gross Ups Excludable from State Taxes Until 2019
In a posting on her "E is for ERISA" blog, Christine P. Roberts, a benefits attorney with Mullen & Henzell LLP, advised the following:
"Many employers that provide benefits to employees’ domestic partners and/or same-sex spouses have followed a practice of grossing up the employees’ taxable compensation to account for the additional federal taxes they must pay on imputed income. The IRS guidance on recouping over-withheld taxes apply only to imputed income amounts, not to the gross-up amounts. Note, however, that California recently adopted a law that will exclude gross-up amounts from employees’ taxable compensation for state personal income tax purposes. AB 362 takes immediate effect and is slated to expire Jan. 1, 2019. You can find a fuller discussion [via Jackson Lewis LLP] of the measure here."
Wither Spousal Benefits?
Of course, like all benefit plans, DP benefits are subject to concerns about costs. Although relatively few employees tend to take advantage of these benefits, cost-conscious companies are still likely to review the necessity of such programs. “The court ruling in Windsor occurred within the context of a larger picture where employers are rethinking their strategy around spousal and dependent coverage in general,” said Wojcik.
Some employers are amending their health benefit plans to eliminate spousal coverage altogether if spouses have health coverage available through their own employer. Recently, for instance, United Parcel Service announced it would no longer provide health benefits to the spouses of its nonunion employees under the assumption that those spouses’ employers are required to offer coverage under the Affordable Care Act. In this environment, it would not be surprising if employers turn the cost microscope to domestic partner benefits.
There are still unresolved questions about what benefits will look like for same-sex couples in nonrecognition states going forward. And until additional guidance and regulations are issued by the IRS, the DOL and other agencies, employers may not have a full picture of the importance of DP benefits.
If an employer does decide to alter or eliminate these benefits, it should do so with care. Even employees who do not take advantage of domestic partner programs could react negatively on behalf of their peers and colleagues if these offerings are cut back or eliminated.
Employers may also want to consider sending this message in a targeted communication. If the change is related to costs, it is important to explain that to those affected. After all, a widespread message to all employees could have a negative impact on morale. “Why tell all employees what you have done to save money when it does not really impact them?” asked Credico.
Moreover, “Employers should consider waiting until the Windsor-related rules and guidance are finalized,” she said. “Employers may find that their domestic partner benefits cover more people than they think.”
Joanne Sammer is a New Jersey-based business and financial writer. Stephen Miller, CEBS, is an online editor/manager for SHRM.
Related External Resource:
Infographic: Most Employers Unclear on How to React to DOMA Ruling, Towers Watson, October 2013
Related SHRM Articles:
IRS Issues Additional Guidance on Same-Sex Spouse Benefits, SHRM Online Benefits, December 2013
How to Design Domestic Partner Benefits, SHRM How-To Guides, September 2013
Retirement Benefits After DOMA, HR Magazine, October 2013
IRS Recognizes All Same-Sex Marriages for Pretax Benefits, SHRM Online Benefits, August 2013
Administering Employee Benefits with Regard to Same-Sex Spouses, SHRM Toolkits, September 2013
Reach of Supreme Court's DOMA Decision Extended, SHRM Online Legal Issues, August 2013
Now What? Employer Benefits Obligations Post-DOMA, SHRM Online Benefits, July 2013
DOMA Ruling Will Change FMLA Administration, SHRM Online Legal Issues, July 2013
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