One question that employers have been exploring recently is whether you can stop taxing health benefits in light of the U.S. Supreme Court’s recent decision declaring the Defense of Marriage Act’s definition of marriage unconstitutional. The complete answer is still somewhat unclear, and there are several basic tax principles to consider.
For individuals who receive domestic partner health benefits, but who are not legally married, the tax treatment will remain the same. However, with respect to same-sex individuals who were legally married in one of the states that recognize same-sex marriage (or the District of Columbia) and who continue to reside therein, the health benefits provided to the non-employee spouse will no longer be taxable. Currently 12 States (Massachusetts, Connecticut, Iowa, Vermont, New Hampshire, New York, Rhode Island, Delaware, Minnesota, Maine, Maryland and Washington) and the District of Columbia recognize same-sex marriage. Also, in light of the Supreme Court’s decision to not rule on the Proposition 8 case, California will now start issuing same-sex marriage licenses.
With respect to individuals who were legally married in one of these states but who now reside in a state that does not recognize same sex-marriage, the taxation of health benefits is currently unclear. The reason for this uncertainty is due to the fact that, for federal income tax purposes, the IRS traditionally looks to the state of residence to determine marital status. Additionally, the Supreme Court’s ruling left in place the provisions of DOMA which provide that states need not recognize same-sex marriages occurring in another state. While it is anticipated that the IRS is going to issue some form of new guidance in the near future to override this result for Federal income tax purposes (i.e., so that individuals covered by this situation are also treated as married for federal income tax purposes), the extent and effect of such guidance is not yet known. Interestingly, a United States District Court recently ruled that, under Ohio law, the marriage of a same-sex couple who were validly married in another state must be recognized in Ohio.
While the Supreme Court’s decision does not specifically address retroactive application, in light of the fact that the relevant provisions of DOMA addressed by the Supreme Court were held to be unconstitutional, it may be possible to file refund claims for the employer’s and employees’ payroll taxes that were paid on imputed income from health benefits. This would potentially cover any open tax years (i.e., 2010 forward).
For more information on this subject, please contact John McGrady at firstname.lastname@example.org or 412-562-1388.
John E. McGrady, III, concentrates his practice on employee benefits and executive compensation matters. He is also a member of the Nontraditional Couples and Families Group.