In United States v. Windsor, the Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional as a violation of the Equal Protection Clause of the Constitution. This ruling will affect a vast number of federal laws.
While the full implications of this ruling will take time and regulatory guidance to understand, what is clear at a minimum is that differential treatment of opposite-gender and same-gender married couples is not permissible in the states that allow or recognize same-gender marriages. At present, there are 17 states, plus the District of Columbia, that do.
One of the many issues left unresolved following the court’s ruling is the impact on same-gender spouses residing in states that do not recognize or directly ban same-gender marriage. Regardless, unless and until a federal court interprets the Windsor decision otherwise, one presumption worth considering is that federal regulatory guidance (when issued) will uniformly recognize all marriages of same-gender couples throughout the United States, provided the marriage is valid in the state where the marriage occurred. There are pros and cons to relying on this presumption, which further underscores the need to seek advice from your legal counsel as to your particular circumstances.
The list below is not exhaustive of all issues that may be impacted by the Supreme Court’s decision, but is intended to identify some of the more commonly occurring issues. Employers and employees are urged to consult with counsel for specific advice on how to assess the Windsor.
Tax Treatment of Employer and Employee Contributions for Coverage of Same-Gender Spouses
Prior to the Supreme Court’s ruling, employees could not pay for health care coverage for their same- gender spouses on a pre-tax basis, and employers were required to impute income to the employees when the cost of coverage was subsidized by the employer for the employees’ same-gender spouses (unless they separately qualified as the employee’s tax dependent). Under the ruling, the federal tax treatment of same-gender spouses (at least those married and residing in one of the 17 above-referenced states or D.C.) may have to be the same as for opposite-gender spouses, allowing for pre-tax premiums and no requirement to impute income for employer-paid coverage.
Flexible Spending Accounts, Health Savings Accounts and Health Reimbursement Accounts
Federal tax laws generally prohibited the reimbursement of expenses of a same-gender spouse or the spouse’s children under any of these plans. In light of the Court’s ruling, employees can certainly claim a right to have their same-gender spouses and the spouse’s children covered by the employer’s cafeteria plan, Flexible Spending Account (FSA), Health Spending Account (HSA) and Health Reimbursement Arrangement (HRA).
Family and Medical Leave Act
Under the Family Medical Leave Act (FMLA), covered employers must allow employees to take up to 12 weeks of unpaid leave in order to take care of certain relatives, such as spouses. While DOMA was in effect, “spouse” was limited to opposite-gender spouses. Under the Supreme Court’s ruling, the FMLA leave protections may extend to care for same-gender spouses.
Estate and Gift Tax Planning Opportunities for Same-Gender Spouses
Questions remain concerning how federal laws will apply to same-gender couples who were validly married in one state, but are filing as residents of another state that does not recognize same-gender marriage. Regardless of and subject to the earlier comments, one presumption is that federal law will uniformly recognize all valid marriages of same-gender couples throughout the United States, unless and until a federal court holds otherwise.
Accordingly, same-gender spouses may now benefit from many federal estate and gift tax advantages, including: (a) portability, which allows a surviving spouse to benefit from the unused estate tax exemption of a deceased spouse under certain circumstances; (b) tax-free transfers between spouses during life and at death; and (c) gift-splitting, which allows one spouse to make a tax-free gift to someone else on behalf of both spouses equal to twice the annual gift tax exclusion amount, provided the appropriate election is made. These examples represent just a few of the federal tax planning privileges now available to same-gender spouses.
State Income Tax Issues
Most states imposing an individual income tax use a taxpayer’s federal income tax return as the starting point for the state income tax return. In the past, this has placed a burden on same-gender couples who are married under their state’s law, because states that allow or recognize same-gender marriages generally require all married couples to file their individual income tax returns as either “married filing jointly” or “married filing separately.”
Before the court’s decision, same-gender married couples were required to file their federal income tax returns as “single” or “head of household,” so states recognizing their marriage would generally require that they recalculate their federal income tax as if they filed their federal income tax returns as “married filing jointly” or “married filing separately.” The recomputed federal income taxes were then used as the basis for determining state income taxes.
It is not yet clear what requirements states that do not allow or recognize same-gender marriage will impose on same-gender couples who file federal income tax returns as “married filing jointly” or “married filing separately.” It is likely, however, that at least some states will require same-gender couples to recalculate their federal income tax as if they filed their federal income tax returns as “single” or “head of household,” and will use the recomputed federal income taxes as the basis for determining state income taxes.
There are very few unequivocally clear take-aways from the Windsor decision. Based upon the facts of that case, those clear mandates are grounded in facts where the marriage of the same-gender couple is recognized under state law but yet federal law dictates an unequal treatment in comparison to samegender couples. Outside that set of facts, legitimate presumptions are the only real guidance available to employers, employees, spouses in same-gender marriages and children of such marriages, among others.
As stated numerous times, we sincerely encourage employers to be proactive in seeking legal counsel regarding the impact of the Windsor decision upon their particular facts and circumstances. Please visit our website for more information.