Same-Sex Marriages: What Do They Mean for Your Benefit Plans?

(Benefits Update, Summer 2008)

On May 15 of this year, the California Supreme Court held that same-sex couples must be permitted to legally marry in California. According to the decision, the failure to designate the relationship of a same-sex couple as a marriage violates the equal protection clause of the California Constitution. When the decision takes effect on June 14, 2008, California will join Massachusetts as the only states that recognize same-sex marriages.

Employers and plan sponsors based in California or with California employees should carefully review their employee benefit plans to determine whether and how to accommodate participants' same-sex spouses. Since there is no residency requirement to marry in California, employers and plan sponsors without a connection to California also need to be prepared.

While the issue of same-sex marriage remains highly controversial in other areas, California has a reputation as a trend-setter in many respects, and this may prove to be one of them. What are the implications of this ruling on employee benefit plans? In this article, we'll take a look.

Existing Federal and State Laws Conflict

While California state law now permits same-sex marriages, employee benefit plans which are subject to the Employee Retirement Income Security Act of 1974 (ERISA) are not required to recognize same-sex marriages. The federal Defense of Marriage Act (DOMA) provides, for purposes of federal law, that "marriage" means only a legal union between one man and one woman as husband and wife, and the word "spouse" refers only to a person of the opposite sex. According to DOMA, no state is required to recognize a same-sex marriage licensed under the laws of another state. In fact, many states have adopted either Constitutional amendments or DOMA-like laws defining marriage as a relationship between a man and a woman.

Although ERISA preemption is broad, ERISA does not preempt state laws regulating insurance. California's domestic partner laws already require both public and private employers to extend the same health and welfare benefits to state-registered domestic partners that are provided to spouses. But because of ERISA preemption, self-insured plans are not subject to this requirement. Employers and plan sponsors of self-insured plans will need to decide whether they want to cover same-sex spouses for benefit purposes.

Federal Tax Issues

One of the reasons that employee benefits remain a hot-button issue is because of their favorable income tax treatment. Specifically, group health plan benefits provided by an employer, including the cost of employer provided group health plan coverage for employees and their family members, is generally exempt from federal income taxation. Although the California decision will exempt health benefits provided to same-sex spouses from California state income tax, DOMA clearly provides that these individuals will not avoid federal income tax implications unless they meet the tax definition of a "dependent."

For those same-sex spouses that fail to qualify as a "dependent," employers and plan sponsors will be required to impute income to employees whose same-sex spouses are enrolled in the health plan. There are also additional issues for cafeteria plans. For example, newly married employees may need to wait until open enrollment to add their same-sex spouse to the plan, because a same-sex marriage is unlikely to be considered a marriage under the change in status rules.

Same-sex spouses can also not be included in a health flexible spending accounts (FSAs), health reimbursement arrangements (HRAs) or a health savings accounts (HSAs), unless the same-sex spouse meets the tax definition of a "dependent."

What Should an Employer Do?

The first step that employers and plan sponsors should take is to decide whether they want to provide benefits to same-sex spouses. Regardless of their decision, employers and plan sponsors should carefully review plan documents to make sure that they accurately reflect the employer's intent. If they don't, change them accordingly.

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