On June 26, 2015, in Obergefell v. Hodges, the Supreme Court of the United States determined that it is unconstitutional for a state to ban same-sex couples from exercising the fundamental right to marry. As a result of this decision, all states are now required to permit same-sex couples to marry and to recognize same-sex marriages validly entered into in other jurisdictions. Immediately prior to the Supreme Court’s decision, 37 states and the District of Columbia permitted same-sex marriage, meaning the impact of the Obergefell decision will be most significant in the remaining 13 states.
In 2013, the Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA), which previously limited any marriage benefits under federal law to opposite-sex spouses, was unconstitutional (see “Supreme Court Rules on DOMA and California’s Proposition 8” for more). Subsequent IRS guidance clarified that favorable federal tax treatment of spousal benefit coverage would extend to all same-sex couples legally married in any jurisdiction with laws authorizing same-sex marriage, regardless of whether the couple currently resided in a state where same-sex marriage is recognized.
Employee Benefits Implications of Obergefell
As a result of the Supreme Court’s Obergefell decision, there is now full equality between same-sex and opposite-sex spouses under both federal and state law. Importantly, full equality means that there is no longer a difference between the federal and state taxation of benefits provided to same-sex spouses.
After Obergefell, employers with fully insured health and welfare plans provided under policies issued in states that, prior to the Supreme Court’s decision, had banned same-sex marriage, will now be required to offer coverage to same-sex spouses that is equivalent to the coverage those employers offer to opposite-sex spouses. Although employers with self-insured plans are not required to provide coverage to same-sex spouses, these employers face a risk of federal and state discrimination lawsuits if they continue to provide coverage only to opposite-sex spouses.
However, Obergefell does not provide any protection for unmarried same-sex partners who are in a domestic partnership or civil union. Now that marriage equality exists between same-sex and opposite-sex spouses, some employers may decide to phase out same-sex domestic partner and civil union benefits. This decision is not a simple one and there are many factors to consider before an employer decides how to proceed in light of Obergefell. For example, if an employer provides coverage to opposite-sex unmarried partners, the employer may be less likely to eliminate unmarried partner coverage because it already covers a set of unmarried employees who have had the ability to marry. On the other hand, if the employer covers only same-sex unmarried partners, and not opposite-sex unmarried partners, the employer might deem it most fair to require same-sex unmarried partner employees to marry in order to retain their benefits. Consequently, the employer will need to determine when the phase-out should be effective and when the best time is to communicate the change in coverage (e.g., at open enrollment or otherwise). Such a phase-out initially may not be possible for certain purposes in jurisdictions such as California, where state law currently requires that health insurance plans treat spouses and domestic partners equally.
The decision to phase out same-sex domestic partner and civil union benefits should not be made without taking into account the historical and political context for why such coverage was initially offered to employees. For example, under the laws of many states, it is not unlawful to discriminate on the basis of sexual orientation. Therefore, gay and lesbian employees can still potentially be terminated on the basis of their sexual orientation without consequence under state law. As a result, it might not be desirable to “force” an employee to take the public step of getting married. In addition, many employees may have spent many years presuming they could never marry their domestic or civil union partner and have structured their affairs accordingly — so an employer should consider whether it would be fair to force those employees to marry their same-sex partner to continue to be eligible for benefit coverage. In addition, employers that continue to offer benefits to only same-sex unmarried partners may face “reverse” discrimination claims from opposite-sex unmarried couples who are denied benefits. While these types of claims have not been successful in the past, they are much more viable now that same-sex couples and opposite-sex couples are similarly situated under the law (at least with respect to the right to marry).
In states where same-sex domestic partnerships or civil unions have been legalized, employees generally do not pay state income taxes on the fair market value of coverage for a non-dependent same-sex spouse, and employees in these states can pay for the same-sex spouse or partner’s coverage using pre-tax dollars for state income tax purposes. Federal law, however, does not apply the same favorable tax treatment to coverage provided for a non-dependent partner in a same-sex domestic partnership or civil union, so employees are still required to pay federal income taxes on the fair market value of such coverage.
Employers who previously provided gross-ups to cover the employee portion of federal (and possibly state) income and employment taxes on benefits for same-sex partners are likely to phase out such gross-ups (if they have not done so already) now that favorable federal and state tax treatment is available to same-sex couples who marry, even though many of these employers may be likely to continue offering benefit coverage to unmarried partners.
Next Steps for Employers
As part of an overall review post-Obergefell, employers in all states should take action to ensure that their benefit plans comply with applicable law with regard to benefits for same-sex spouses. Employers should review their employee benefit plans to prepare for requests for benefits coverage from employees who marry their same-sex partner, particularly in states where same-sex marriage was not previously legal. Additionally, employers should review their health and welfare plans to determine whether any Obergefell-related amendments may be required or desired prior to the end of 2015 to clarify the administration of spousal rights and benefits for same-sex spouses.
The most common requests for benefits for a same-sex spouse are likely to be coverage under an employer’s medical, dental and vision plans, in addition to certain spousal benefits that are required by federal law (e.g., spousal protection under qualified retirement plans and special enrollment and COBRA rights under health and welfare plans). Benefit requests may relate to any of the employer’s various benefit programs, particularly those benefits where equality for same-sex spouses were not previously required by state law. Other spousal benefits that employers may need to extend to employees’ same-sex spouses can include group rates for insurance plans, such as supplemental life insurance, long-term care insurance, home insurance and automobile insurance, as well as other benefits such as bereavement leave, moving or relocation expenses, tuition reimbursement, employee discounts and employee assistance programs.
Now that marriage equality exists between same-sex and opposite-sex spouses, employers should determine whether any changes, such as a phase-out of coverage, should be made to the coverage and other benefit options provided to unmarried partners who are in a domestic partnership or civil union. The employer should delicately consider how any such phase-out of coverage would apply to coverage provided to same-sex and opposite-sex unmarried partners, as applicable. The employer should take care to properly communicate any benefit phase-out and revise any applicable enrollment materials and corresponding plan documents.
In addition to extending required benefits to same-sex spouses, employers should review their payroll procedures with respect to the taxation of such benefits to ensure the proper federal and state tax treatment of benefits extended to same-sex spouses and consider how to communicate these changes to employees.