Same-Sex Marriage and Your Employee Benefit Plans
Maine has now officially joined nine other states in allowing same-sex marriage. The new Maine law ("An Act to Allow Marriage Licenses for Same-sex Couples and Protect Religious Freedom") was approved by a referendum election on November 6, 2012, and it became effective December 29, 2012. Some municipal offices around the state have already issued marriage licenses to same-sex couples, and many of those couples will have been wed by January 1, 2013. That leaves many of our clients asking: what does this mean for our employee benefit plans?
Maine's Same-Sex Marriage Law
Maine's same-sex marriage law defines marriage broadly as a legally recognized union of two people. Given the law's breadth, all references to spouses under the Maine tax laws, insurance laws, and other Maine laws affecting employee benefits should be read to include both same-sex and opposite-sex married couples. The law also affirms that same-sex marriages that are valid ("licensed and certified" in the language of the statute) in another state will be recognized in Maine. The law does not recognize civil unions or other forms of committed legal relationships under the laws of other states as equivalent to marriages.
ERISA generally preempts state laws relating to employee benefits. ERISA does not, however, preempt state laws regulating insurance. So it is likely that fully insured group health plans and other welfare plans will be required to cover same-sex spouses on the same basis as opposite-sex spouses as a result of the new Maine law.
An employer with a self-insured group health plan may be able to claim exemption from Maine state law under ERISA's preemption provisions depending upon the terms of the plan. If a self-insured plan covers spouses as defined under Maine law (or doesn't define the term "spouse"), the plan may automatically be deemed to cover same-sex spouses. Therefore, an employer would have to amend its plan to adopt a different definition of spouse it if wished to avoid covering same-sex spouses. For example, the plan could adopt the definition of "spouse" under the federal Defense of Marriage Act, which only recognizes marriages between opposite sex spouses.
Defense of Marriage Act (DOMA)
In general, DOMA provides that for purposes of interpreting or applying any federal law (including agency rules and regulations), the term "marriage" means a legal union of one man and one woman as husband and wife and that the term "spouse" refers only to a person of the opposite sex who is a husband or a wife. Therefore, a same-sex spouse is not treated as a legal spouse under ERISA and the Internal Revenue Code and the same-sex couple cannot be treated as married under those laws.
In October, the U.S. Court of Appeals for the Second Circuit upheld a district court decision that key elements of DOMA are unconstitutional. The U.S. Supreme Court will be reviewing that decision during its 2013 term. If the Supreme Court strikes down DOMA, the federal government would likely be required to respect state laws that recognize same-sex marriages and extend to same-sex couples the same legal rights and benefits that opposite sex couples now enjoy.
Federal Tax Implications
The federal income tax treatment of same-sex marriages (and the treatment of same-sex couples under other federal laws) is still governed by DOMA. Because of DOMA, health and welfare benefits provided to same-sex spouses do not receive favorable tax treatment unless the same-sex spouse qualifies as an employee's dependent for federal income tax purposes. In addition, same-sex spouses are not treated as spouses for purposes of the rules governing retirement plans. Among other things, this has the following implications:
- Health Plans. Under Code Section 106, employer-provided benefits that extend to spouses are excluded from gross income for federal income tax. If a same-sex spouse is not recognized as a legal spouse (and does not qualify as a tax-qualified dependent for federal law), then the fair market value of the employer-provided health benefits must be included in the employee's income as wages.
- Cafeteria Plans. Under Code Section 125, employees may purchase welfare benefits on a pre-tax basis under a cafeteria plan. In addition, employees may contribute to a health FSA to reimburse medical expenses of the employee, the employee's spouse, and his or her dependents. A same-sex spouse will not be treated as a spouse under the Internal Revenue Code. Accordingly, unless the same-sex spouse qualifies as a "dependent," the employee cannot contribute towards the benefits covering the same-sex spouse (e.g., health insurance) on a pre-tax basis. Instead, contributions must be made on an after-tax basis. In addition, an employee may not seek reimbursement of expenses for a same-sex spouse that doesn't qualify as a dependent under the health FSA.
- Withholding. Benefits that are includible in income under federal law are subject to income and employment tax withholding.
- Retirement Benefits. Same-sex spouses are not treated as spouses under the Internal Revenue Code under the special rules for spouses, including automatic payments in the form of a qualified joint and survivor annuity, spousal consent requirements, and payments to a former spouse pursuant to a qualified domestic relations order.
As noted, these income tax consequences will likely change if the Supreme Court finds that DOMA is unconstitutional.
State Tax Implications
The new Maine law does not alter the impact of DOMA on federal tax laws. Accordingly, at least for the present, benefits for same-sex spouses will be treated under federal income tax laws in the same manner as benefits for domestic partners. However, the new Maine law changes the state tax picture for same-sex couples considerably.
Maine Revenue Services has not issued guidance specifically describing how employee benefits provided to same-sex spouses will be taxed under the new law. However, Maine Revenue Services has issued a Maine Tax Alert (December 2012, vol. 22, Issue 11), which provides that same-sex spouses should file their Maine tax return as either "married filing jointly" or "married filing separately" even if they file separate returns under federal law.
Given this position and the breadth of the new law, we expect that same-sex marriages and same-sex spouses will be treated exactly the same as opposite-sex marriages and spouse for purposes of Maine income tax laws. (This would be in line with the tax laws of most other states that allow same-sex marriage.) If this is the case, spousal benefits that receive favorable tax treatment for opposite-sex partners will receive favorable tax treatment for same-sex partners, and the value of employer-provided benefits will not be includable in income and subject to withholding under Maine law. Also, contributions under a cafeteria plan made by an employee covering a same-sex spouse will reduce the employee's income for purposes of Maine state income taxes.
Next Steps for Employers
All of this will add to the complexity of administering employee benefit plans. For so long as DOMA remains the law of the land, employee benefit programs that carry favorable tax attributes for married couples will be treated one way for federal tax purposes and another way for state tax purposes in Maine and elsewhere. At a minimum, employers who have employees that are part of a same-sex married couple will have to adjust their payroll systems to accommodate this difference. Administrative forms that identify spouses and are used in determining the payment of benefits (such as life insurance and certain other benefits) should also be reviewed to determine whether state same-sex marriage laws are implicated.
Employers that offer domestic partner benefits and operate in Maine or other states that permit same-sex marriage will face the added challenge of maintaining those separate administrative structures. Alternatively, those employers may wish to consider eliminating domestic partner benefits entirely on the theory that marriage would now be available to same-sex couples.
There will be more to say about these issues in the future, and we expect to return to this subject in the coming year in light of any agency guidance and after the U.S. Supreme Court determines the fate of DOMA.