The Supreme Court of the United States, in a ruling on the Obergefell v. Hodges case, asserted that bans on same-sex couples from being able to marry is unconstitutional. This ruling now requires all states in the federation to allow the marriage of same-sex couples and to recognize same-sex marriages validly conducted in other jurisdictions. Prior to the ruling, 13 states had placed bans on same-sex marriages.
Two years before this ruling in 2013, the Supreme Court rejected the legitimacy of Section 3 of the Defense of Marriage Act (DOMA) that previously restricted any marriage benefits to opposite-sex spouses only. Following the Supreme Court’s decision on DOMA, the IRS made adjustable changes to guidelines stipulating that favorable federal tax treatment of spousal benefit coverage would extend to all same-sex couples lawfully wedded in any jurisdiction where it is permissible, regardless of whether or not the couple thereafter moved to a state where same-sex marriage is acknowledged.
What Changes Would Apply to Employee Benefits?
Major changes in employee benefits following the Supreme Court’s decision on same-sex marriage will bear on the fact that there is currently full equality between opposite-sex marriages and same-sex marriages. These changes may be marred by several challenges though.
- Same-Sex Couples to Receive Same Coverage as Opposite-Sex Couples
Although employers with well-insured health and welfare plans are not required to provide coverage to same-sex spouses, if they do not do so, they could be indicted in discrimination lawsuits if coverage is provided only to opposite-sex spouses.
- Federal Income Tax to be Paid on the Fair Market Value of Coverage for a Non-Dependent Partner
Essentially, employees are not required to pay state income tax on the fair market value of coverage for a non-dependent partner in states where same-sex civil unions or domestic partnerships are acknowledged. Accordingly, coverage can be paid for with pre-tax dollars. This is not the case under federal law, and so federal income tax is to be paid on the fair market value of such coverage.
- Elimination of Gross-ups
Gross-ups which covered the employee portion of federal and maybe state income and employment taxes on benefits for same-sex partners are likely to be slashed off, seeing that same-sex couples are now liable to get favorable federal and state tax treatment when they wed.
- Phasing Out of Same-Sex Unmarried Partner Benefits Coverage
Employers who provided benefits coverage to unmarried same-sex partners only because of the inability to marry, may now find it necessary to phase out this coverage in favor of coverage for both married same-sex and opposite-sex partners.
- This development may not be feasible in jurisdictions like California where health insurance plans are required by state law to treat domestic partners and spouses equally.
- In states where state law condones job termination on the basis of sexual orientation, it may not be appropriate to coerce employees to marry before they receive employee benefits.
- If this coverage is not phased out, employers may face reverse discrimination claims from unmarried opposite-sex partners.
Review of Payroll Methodology
Adopting these new changes will inevitably lead to disruptions in payroll procedures with respect to taxation or employee benefits. It is therefore important to update and review your payroll procedures to ensure that there is proper compliance. TRAXPayroll prides itself on having developed a flexible and user-friendly interface for easy designing, reviewing, and updating of payroll procedures and whenever you need advice on how to tackle new rulings like this for your payroll procedures, you can always count on the expertise of our team.