If you’re an employer whose benefit plans are subject to the Employee Retirement Income Security Act, you should seriously consider how your organization will respond to the Supreme Court’s Defense of Marriage Act ruling and subsequent Internal Revenue Service clarifications this fall. As several employers I work with have learned, you may have more employees who are affected than you realize.
The Employee Retirement Income Security Act of 1974 is commonly known as ERISA. Generally, it is the full body of laws that regulate employee benefit plans. When the Supreme Court ruled against a major provision of DOMA in June, it essentially said the federal government will recognize same-sex marriages in states where it is legal, allowing for equal rights to benefits under federal law that all other married couples receive. The IRS and Treasury Department then issued guidance, adopting a “state of celebration” rule. This rule essentially says that if a same-sex couple is married in a state that recognizes same-sex marriages, the federal government will recognize the marriage even if the couple moves to a state where the marriage is not recognized. This has significant implications for employers as benefit providers.
For example, if an ERISA-regulated health plan allows for spouses to be covered as dependents, on many plans contributions for those benefits are deducted from an employee’s pay before taxes are withheld, lowering taxable wages. Before the DOMA ruling, if a same-sex partner could be covered, it was as a domestic partner – not as a spouse – and domestic partner contributions to the plan do not enjoy the spouse benefit of being made pre-tax. Now, after the DOMA ruling, legal same-sex spouses may contribute to their coverage pre-tax. Sound simple? Not really.
What if a legally married same-sex couple moves to a state where same-sex marriages are not recognized, such as Idaho? In this situation, the state may not allow for pre-tax contributions. For many large employers with locations in multiple states and mobile employees moving across state lines, they now face some tricky rules to administer. The employee may now pay for benefits pre-tax for federal purposes and pay imputed income to the state.
Under either scenario, individuals who are affected want to know their company is responding to the rule change so they receive the associated tax benefits, whether the benefit is federal only or federal and state.
One employer I work with was trying to determine how to communicate these changes to employees. This employer has locations across the United States and allows same-sex domestic partners on its health plans already. Out of about 8,000 employees, the company only had four same-sex domestic partners enrolled on its health plan. When we sat down to discuss a communication strategy, the benefit director pulled the names of the employees with same-sex domestic partners and intended to send them each individual emails. After we talked through the issues, she decided a comprehensive letter to all employees was a better strategy. Here’s why.
As I said above, there are tax consequences for enrolling domestic partners on health plans. Generally, if a domestic partner has another source of coverage, through maybe his own employer, it makes better tax sense to take the pre-tax benefit and avoid using post-tax dollars for health insurance as well as having to pay imputed income. So while the benefit may have been available, it wasn’t always the smartest choice. Therefore, an employer cannot make the assumption, as my client originally did, that the only people affected are individuals already enrolling same-sex domestic partners on the company’s health plan. They really have no idea how many individuals may be in same-sex relationships or are now legally married to same-sex spouses.
Employers also need to keep in mind that health plans are not the only benefits affected by this ruling. For example, 401(k) plans automatically default to the beneficiary being the legal spouse, unless the spouse signs away the right before a notary. So same-sex couples need to consider this when they declare whom they intend to leave their benefits to – if one spouse wants to leave the benefits to his mother, his same-sex legal spouse must consent.
The Family and Medical Leave Act is another affected benefit. Now, legal same-sex spouses may be eligible for FMLA to care for a seriously ill same-sex spouse or for activities related to a same-sex spouse’s military deployment.
But it is not just the same-sex employee who may benefit from these rulings. Employers may also be able to file for tax refunds or adjustments of federal employment taxes paid on benefits provided to legally married same-sex spouses in 2013 as well as for prior open tax years. The IRS handed down this clarification in September. While the administrative costs associated with filing for the refund may not outweigh what is due back, it is something several large employers are evaluating.
The bottom line is that there is a lot for employers to think about regarding DOMA, especially as more states – New Jersey most recently – legalize same-sex marriage. And it is important that as you communicate your response, you don’t make the mistake of assuming you know which of your employees is affected. You really have no way of knowing who may or may not be involved in a same-sex relationship, or who is now legally married. You need to communicate to everyone.
Michelle Hicks, a senior professional in human resources, is a director in the communication practice of Buck Consultants, a Xerox company.
The second to the last paragraph ‘But it is not just the same-sex employee who may benefit …’ – what is a ‘same-sex’ employee? In all honesty, while there are seriously important points being made, in reality these are married couples, spouses, individuals who are employed in every state within the United States. In States where it is considered constitutional and legal to deny the same equal protections and benefits to certain citizens (a minority), employee litigation opportunities are endless.
Employers are going to be faced with many challenges, including potential outright discrimination should any employee feel they have been treated differently once informing an employer of their marital status. All of these valid points are important and should really be taken quite seriously as they may relate to any employer.
Defining these points as they relate to Employers, discrimination becomes blatantly obvious. State laws, laws intended to discriminate, are laws which cost employers and all taxpayers a great deal of money. As long as the law requires employers enforce discriminatory application of taxes on benefits and payroll related items, HR must remain very engaged.