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Employer-provided spousal benefits face different requirements from state to state

Bret ClarkIdaho-based employers with employees in multiple states could be subject to significant penalties and litigation if they do not comply with the laws of each state regarding group health coverage and other benefits provided to the same-sex spouses of employees.

Such employers should review the laws of each state where they have employees to confirm that the administration of any benefits offered to spouses complies with applicable law in light of the Supreme Court’s recent decision in United States v. Windsor requiring the federal government to recognize same-sex marriage.

Coverage for same-sex spouses in Idaho

Because Idaho does not recognize same-sex marriage, Idaho employers are free to limit coverage to opposite-sex spouses of Idaho employees and exclude same-sex spouses.

On the other hand, Idaho employers can elect to offer coverage to same-sex spouses.

Health coverage provided to spouses and dependents is generally provided tax-free for income tax purposes. Since same-sex spouses are recognized under federal law, if an Idaho employer provides coverage to the same-sex spouse of an Idaho employee, the coverage will be tax-free to the employee for federal income and employment tax purposes.

However, because Idaho does not recognize same-sex marriage, the value of any benefits provided to the same-sex spouse of an Idaho employee must be imputed as income to the employee for Idaho income tax purposes.

Accordingly, the difference between federal and Idaho recognition of marriage complicates the administration of same-sex spouse benefits for Idaho employees.

This administrative burden increases significantly when an Idaho employer has employees in other states, because state rules regarding whether employees that offer benefits to spouses can exclude same-sex spouses and the taxation of benefits provided to same-sex spouses vary widely from state to state.

Some states require same-sex spouse coverage

If an employer offers coverage to opposite-sex spouses, some states require the employer to also offer coverage to same-sex spouses. Idaho-based employers with employees in these states face penalties and risk litigation if they exclude same-sex spouses.

For example, California prohibits discrimination in the terms of employment on the basis of an employee’s sexual orientation. Offering coverage to opposite-sex spouses but excluding same-sex spouses is discriminatory. Any Idaho employer with employees in California is inviting employment discrimination claims if it offers coverage to the opposite-sex spouses of California employees but excludes same-sex spouses.

As a result, Idaho employers with employees in other states need to review the law of each state to confirm whether state law requires coverage to be offered to same-sex spouses.

State income taxation of benefits to same-sex spouses varies

In order to avoid having to research the law of every state and administer benefits differently from state to state, Idaho employers may consider offering coverage to all same-sex spouses. However, employers will still have to review the law of each state to determine the tax treatment in each state for same-sex spouse benefits.

Health benefits provided to same-sex spouses are generally tax-free for federal income and employment tax purpose. Similarly, many states, like California, do not tax same-sex spouse benefits for state income tax purposes. However, many states, like Idaho, require the value of benefits provided to same-sex spouses to be imputed as income to the employee for state income tax purposes.

Multistate employers that offer benefits to same-sex spouses must understand the tax treatment of such benefits in each state where same-sex spouse coverage is provided.

Employers must confirm they comply with state law

Regardless of whether an Idaho employer with employees in multiple states excludes same-sex spouses from its benefit plans or offers coverage to same-sex spouses, the employer must confirm that it complies with the state discrimination and tax law or it faces potential penalties and litigation.

Bret Clark, an attorney at Hawley Troxell, provides legal services to the firm’s employee benefits and executive compensation clients. He can be reached at bclark@hawleytroxell.com.

 

 

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