Court’s DOMA decision changes employee benefit and tax law landscape

Calling it an unconstitutional violation of the Fifth Amendment, the U.S. Supreme Court has struck down a federal law defining marriage as between one man and one woman.  The landmark 5-4 decision comes 17 years after the Defense of Marriage Act (DOMA) received bipartisan Congressional support and was signed by President Clinton.

The high court’s ruling extends federal recognition to same-sex marriages in the states where they are legal, and will add the country’s most populous state—California—to the 12 others in that category…meaning about 30 percent of Americans live in states recognizing same-sex marriage.  Meanwhile, the Justice’s opinion has no direct effect on the constitutional amendments in 29 states that limit marriage to traditional couples.

This over-turn of DOMA is expected to involve a major overhaul of federal rules affecting employee benefits administration and payroll operations.  Same-sex couples who legally wed, where allowed, now must be treated as spouses under the Internal Revenue Code (IRC), the Employee Retirement Income Security Act (ERISA), and more than 1,000 other federal laws.

Here are just a few examples…

FICA Taxes          

Before the Supreme Court decision, employer-paid healthcare coverage for a same-sex spouse was not excluded from income, because the Internal Revenue Service (IRS) did not recognize the marriage.  The value of the benefit was therefore included in income and subject to both employer and employee payroll taxes.

Just as with heterosexual spouses, these amounts are no longer included in income for same-sex couples who are recognized as married under state law.  Employers may be able to file refund claims and amend Forms W-2 to exclude the value of healthcare coverage provided to a same-sex spouse for open tax years (generally 2010, 2011, and 2012).

Benefits

These rights and rules now must be extended to same-sex spouses for marriages that are valid under state law:

  • COBRA continuation health coverage;*
  • the ability to use a spouse’s flexible spending account (FSA), health reimbursement arrangement (HRA) or health savings account (HRA); and
  • leaves of absence under the Family & Medical Leave Act (FMLA).

Although many outstanding/unresolved issues still remain, employers and affected employees alike should begin to determine what initial changes are needed.  Further IRS guidance is anticipated!  Stay tuned to the Capital Connection, as future posts will discuss the effects of the decision in more detail.


Note: For federal purposes, including COBRA, the change is effective as of June 26, 2013.  As of that date, a same sex couple that is married under state law has the same right to COBRA as an opposite sex married couple.  Therefore, TASC will administer same sex couples exactly the same as opposite sex couples (i.e. same premium rates, 36 month events, etc.).  This does not affect the domestic partner rules currently administered under COBRA as the domestic partner did not gain rights under this change.

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