Recent changes to Illinois and New York state laws impact health benefits, specifically the taxation of covering domestic partners, civil union partners and same-sex spouses.

Illinois

The Illinois Religious Freedom Protection and Civil Union Act became effective June 1, 2011. The Illinois Act provides for civil unions between same-sex or opposite-sex couples to have the same rights, protections and benefits of spouses. We discussed the effect on benefit plans in an earlier article. While many questions remain unanswered, we have learned more information about state taxation in Illinois.

We confirmed with the Illinois Department of Revenue that there is no change for state income tax purposes. Illinois will continue to follow the federal tax rules. As a result, civil union partners in Illinois will have imputed income for purposes of state income tax (unless the partner is certified as a tax dependent). There should be no changes to payroll systems. The result is somewhat unexpected considering the breadth of the Illinois civil union law, but the Department explained that the Illinois tax code incorporates the federal tax code. Illinois Department of Revenue published an announcement that confirms Illinois state income tax does not recognize civil unions.

New York

The New York Marriage Equality Act will become effective July 24, 2011. The New York Act provides for same-sex marriages to have the same rights, protections and benefits of opposite-sex marriages.  The statute provides that “all gender-specific language or terms shall be construed in a gender-neutral manner.” However, an earlier advisory opinion regarding New York state income tax explained that New York income tax terms have the same meaning as the federal tax terms – and federal income tax does not recognize same-sex marriages.

The New York Department of Taxation and Finance is expected to publish a memo addressing tax treatment for same gender marriages. In light of the interpretation in Illinois to continue to follow federal tax definitions, and past guidance about New York income tax following federal tax definitions, it seems best to wait for the memo before updating your benefits systems.

The recent state activity has again spurred discussion of the federal tax treatment of health coverage for domestic partners, civil union partners and same-sex spouses. See our prior post regarding the Defense of Marriage Act and health care reform.