The June 2011 passage of New York's Marriage Equality Act has opened-up legal questions regarding its implementation throughout the state. One area of concern is the impact legalization of same-sex marriage will have on employee benefits.
"The legalization of same-sex marriage in New York is obviously a huge development in the area of same-sex couple rights. The primary impact on benefit plans will be that employers with fully insured health and dental plans in New York will now be required to offer the same benefits to same-sex spouses of employees as they offer to opposite-sex spouses of employees," commented Todd A. Solomon, a partner at law firm McDermott Will & Emery who specializes in employee benefits law.
"This will impact many plans and will require employees to communicate new benefit entitlements to employees. However, employers with self-insured plans will not be required to do so, and will have the ability to decide which coverage, if any, they would like to offer to employees and their same-sex partners," he added.
Solomon believes that the taxation of health and dental benefits offered to same-sex spouses will be very complex, and added that, "While employers will typically have to tax employees on the benefits offered to same-sex spouses for federal tax purposes (due to the Defense of Marriage Act), they may not need to do so for state tax purposes. I expect the New York Department of Revenue to issue guidance on this issue very soon. There will of course be other personal financial, estate planning, and related implications for New York same-sex couples who marry once the new law comes into effect."
How Tax 'Gross-Ups' Work
According to a description provided by Solomon, a tax gross-up for the health benefits of same-sex spouses or domestic partners works this way:
• Consider an employer that wants to gross-up an employee in the 20 percent tax bracket. The fair market value of the employee's nondependent same-sex spouse/partner coverage is determined to be $200 per pay period.
• The employee will incur $40 of tax ($200 x 20 percent) for that pay period. To gross-up the employee, the employer would need to make an additional payment of $48 to this employee—$40 would serve as reimbursement for the tax incurred on the benefits coverage and the other $8 ($40 x 20 percent) would serve as an approximate reimbursement of the tax paid on the gross-up payment itself.
Note that this example does not include state tax, Social Security (FICA) and Medicare taxes.
Employees with same-sex spouses or domestic partners will pay about $1,069 more a year in taxes, on average, than a married employee with the same coverage, according to a 2007 report by M.V. Lee Badgett, research director of the Williams Institute, a research group that studies sexual orientation policy issues.
Same-Sex Marriage and Employee Benefit Plans
Health and Welfare Plans
>Employer response depends on whether the employee lives in a state that has passed a state-level Defense of Marriage Act (DOMA):
• DOMA state – employer does not have to recognize same-sex marriage for plan eligibility purposes.
• Non-DOMA state – employer may have to recognize same-sex marriage for plan eligibility purposes.
>Employer response depends on whether plans are self-insured or insured:
• Self-insured plans are governed only by federal Employee Retirement Income Security Act (ERISA) and under the federal DOMA, plans do not have to recognize otherwise valid same-sex marriages.
• Fully insured plans are affected by state law benefit mandates and may have to recognize same-sex marriages:
– California Insurance Equality Act (AB 2208).
– New York and Connecticut Insurance Department Bulletins.
> Consolidated Omnibus Budget Reconciliation Act (COBRA):
• Continuation of coverage not required as a result of federal DOMA.
• New COBRA subsidy (economic stimulus) does not apply to domestic partners (“bifurcated subsidy”).
> 401(k) Plans:
• Participants can name any party as beneficiary.
• Pension Protection Act provided rollover and hardship withdrawal rights for domestic partners and same-sex spouses who are named beneficiaries under the plan.
• While the rollover provision was made mandatory beginning in 2010, the hardship withdrawal provision is optional and only takes effect if the plan sponsor chooses to implement it.
> Defined Benefit Pension Plans:
• Generally must offer married participants payment in the form of a qualified joint and survivor annuity (QJSA) with pre-retirement spousal death benefit (QPSA) coverage.
• Under federal DOMA, employers are not required to offer QJSA/QPSA rights to same-sex spouses, although some employers have added them.
Family and Medical Leave Act (FMLA)
• Federal DOMA governs.
• U.S. Department of Labor Administrator’s Interpretation 2010-3 issued June 22, 2010, clarifies that nonbiological parents are permitted unpaid FMLA leave for the birth or placement of a child or to care for a child with a serious health condition.
-- Todd Solomon, partner, McDermott Will & Emery (adapted from his presentation at 2011 SHRM Annual Conference & Exposition, June 2011).
Same-Sex Partner and Spouse Benefits
Health benefits for employees’ same-sex partners or spouses is a nuanced and ever-changing issue, says attorney Todd Solomon, who offers insights into some developing trends.
View this video
As of July 2011, same-sex marriages are legally performed in and recognized by:
• Massachusetts (2004).
• Connecticut (2008).
• Iowa (2009).
• Vermont (2009).
• New Hampshire (2010).
• Washington D.C. (2010).
• New York (2011)
Same-sex marriage was legal in California from June 17-November 4, 2008, and over 18,000 same-sex marriages performed in California during that period continue to be valid and recognized by state law.
In addition, Massachusetts, Connecticut, Iowa, Vermont, New Hampshire, Washington D.C., and New York recognize same-sex marriages performed in other states where same-sex marriage is legal. California recognized same-sex marriages performed in other states between June 17-November 4, 2008.
In other states, the matter remains ambiguous. For example, Solomon noted:
• Rhode Island’s Attorney General issued an advisory opinion in February 2007 concluding that the state can recognize same-sex marriages performed in other states. However, the Rhode Island Supreme Court refused to grant a divorce to a same-sex couple that same year.
• Maryland’s Attorney General issued an opinion statement in February 2010 directing state agencies to recognize same-sex marriages performed in other states, despite marriage being defined as an opposite-sex union under state law.
• New Mexico’s Attorney General issued an advisory opinion in January 2011 concluding that state law permits the recognition of same-sex marriages performed in other states. It is unclear at this time what impact the advisory opinion will have.
• New Jersey recognizes same-sex civil unions (2007).
• Illinois began recognizing same-sex and opposite-sex civil unions on June 1, 2011.
• Rhode Island's Gov. Lincoln Chafee signed a bill into law allowing civil unions for same-sex couples on July 2, 2011, effective immediately.
• Delaware will recognize same-sex civil unions beginning Jan. 1, 2012.
• Hawaii will recognize same-sex and opposite-sex civil unions beginning Jan.1, 2012.
• Vermont recognizes civil unions performed before Sept. 1, 2009 and same-sex marriages performed after that date.
• New Hampshire and Vermont automatically converted civil unions to marriages now that same-sex marriage is legal in those states.
• Full rights: California (1999), Nevada (2009), Oregon (2008), Washington (2007) and the District of Columbia (2002).
• Limited rights: Maine (2004), Maryland (2008), New Jersey (for registrations prior to Feb. 19, 2007), and Wisconsin (2009).
• Colorado (July 1, 2009).
Equal Benefits Gain Ground
, HR Magazine
, June 2011
Barclays to Reimburse U.S. Workers for Taxes on Domestic Partner Benefits, SHRM Online Benefits Discipline, October 2010
Best-Practice Benefits for Same-Sex Couples, SHRM Online Benefits Discipline, July 2010
Amending Plan Documents to Recognize Same-Sex Spouses, SHRM Online Benefits Discipline, June 2010
Employee Benefits: Steps Employers Should Take to Ensure Employee Benefit Plans Comply With New York's Law On Same-Sex Marriages, Bond, Schoeneck & King, PLLC, July 2011
Legal Same-Sex Marriage in State Leads Companies to Cut Partner Benefits, New York Times, June 2011
SHRM Online Benefits Discipline