Bob Radecki is the President of Benefit Comply, and our first guest contributor to FrenkelySpeaking.
Here are some of highlights from the seminar I hosted for Frenkel’s clients yesterday.
The shifting legal landscape of domestic partner relationships and same-sex marriage has created significant challenges for employee benefits managers. Some employers have voluntarily extended benefits to same-sex and domestic partners, ahead of any laws that require it. But as state laws change, even those employers face new regulations about how those benefits are treated for tax purposes. The challenge is even greater for employers with employees in multiple states: how will they keep up and stay compliant with multiple sets of changing laws?
The trends are not unfolding in predictable patterns: who would have guessed a few years ago that Iowa—not exactly known as a hot bed of progressive politics—would recognize same-sex marriages before states like California and New York?
So, what can employers do to keep their plan benefits programming grounded in the near term?
Here are three cornerstones that will help:
Know how state insurance laws affect your plan – In general, a state’s insurance law requirements apply to fully insured employer plans issued in that state. Companies with self-funded plans or fully insured written in other states are often exempt from these coverage requirements. ERISA, the federal law that governs self-insured employers, preempts most state laws, except those that are extra-territorial.
Factor in the tax impact of DOMA – The federal Defense of Marriage Act (DOMA) prohibits recognition of same-sex partners as spouses for federal tax purposes, even if the couple resides in a state that recognizes the union or marriage for its own tax purposes. Generally, legally same-sex spouses pay federal tax on employer subsidized coverage. These benefits would be provided free of state income tax. However, domestic partner benefits are taxable for both state and federal income tax purposes.
Understand who qualifies as Code §152 dependents – As is true for opposite-sex marriages, spouses and children of same-sex marriages often qualify as dependents under federal tax law, which allows the employee to cover his/her dependents tax-free, even on a federal basis. The criteria are specific for meeting this provision, so you should ask your accountant or insurance broker for the details.
Of course, changes to these rules will continue as more and more states consider this issue, and numerous other factors also play in, such as the demographics of specific employee populations and individual company philosophies. This issue is complex, and it’s only getting more complicated. Focusing on these three sets of laws, though, will help organize your planning into actionable steps.