On Feb. 28, 2013, approximately 286 businesses and municipal employers filed an amicus brief in support of a challenge to the federal Defense of Marriage Act (DOMA), now before the U.S. Supreme Court.
The brief argues that DOMA, enacted in 1996, requires employers to treat employees married to someone of the same sex and those married to someone of a different sex unequally in terms of spousal benefits and that the law strains business efficiency and damages morale.
Signers included Amazon.com, Apple, Bank of New York, CBS, Cisco Systems, Citigroup, Deutsche Bank, Facebook, Google, JetBlue, Johnson & Johnson, Levi Strauss & Co, Liberty Mutual, Marriott International, Microsoft, Morgan Stanley, Nike, Pfizer, Starbucks, Twitter, Viacom, Walt Disney Co., Xerox, and the cities of Baltimore, Boston, Los Angeles, New York, San Francisco, Santa Monica and Seattle.
A related case before the Supreme Court seeks to repeal California’s ban on marriage for same-sex couples under Proposition 8, a ballot initiative that California voters passed in 2008. The DOMA and Proposition 8 cases are expected to be argued together in March 2013, with a ruling expected by the end of June.
A fork in the road
The Supreme Court’s rulings involving the constitutionality of DOMA and Proposition 8 will be a fork in the road for same-sex couples in the U.S., said attorney Todd Solomon, an authority on issues surrounding same-sex marriage, to SHRM Online.
There are a number of ways the rulings could go, “but the true ‘game changer’ would be if the court finds it unconstitutional for any state to ban same-sex marriage, which 38 of them currently do,” said Solomon, a partner at law firm McDermott Will & Emery.
“This is not necessarily at issue in the DOMA case but is potentially at issue in the California Proposition 8 case,” he explained. “If the court rules so broadly as to find that no state can ban same-sex marriage, and the court also overturns DOMA, suddenly, same-sex marriage is recognized all over the country for state and federal law purposes. This would presumably give full equality to same-sex spouses married in any country and in any state and would remove the complexity of offering benefits to same-sex couples and the related tax implications.”
Tax status of employee benefits affected
From an employee-benefits perspective, Solomon said, the DOMA case could solve many problems that same-sex couples encounter, regardless of what the court rules in the Proposition 8 case.
But should the court overturn DOMA, it’s still unclear -- and might rely on the wording of the court’s ruling -- the extent to which couples married in a state that recognizes same-sex marriage but residing and working in a state that does not would be entitled to equal federal and state tax treatment for same-sex spousal benefits.
One possible outcome: The court strikes down DOMA’s provision banning the federal government from recognizing same-sex marriages that are valid under state laws but maintains the provision allowing states to refuse to recognize same-sex marriages performed in other states. In that case, it’s likely an employer in a state that recognizes same-sex marriage could provide the spouse of a same-sex employee with health care benefits exempt from federal and state taxation. However, in a state that does not recognize same-sex marriages, the employer could provide health care benefits exempt from federal taxation but still subject to state taxation.
“If the Supreme Court overturns DOMA, those same-sex couples in states that allow same-sex marriages, such as New York, would see the most dramatic expansion of benefits at a federal level,” said Solomon. “There are over 1,000 federal rights that married couples receive under federal law, including the right to receive tax-free health benefits coverage under an employer’s plan, receive Social Security spousal death benefits and file taxes jointly. However, for those same-sex couples in states that do not recognize same-sex marriage, such as Florida, a repeal of DOMA may not end up being that meaningful.”
Revisiting tax ‘gross-ups’
A growing number of U.S. employers are providing tax-equalization “gross-ups” to cover the additional federal and state taxes employees must pay on same-sex domestic partners’ or spouses’ health benefits in the U.S. That practice and its associated costs would not be necessary if same-sex couples received the same tax treatment as opposite-sex spouses, Solomon noted.
How DOMA affects benefit plan sponsors
“We want the Supreme Court to understand the unequal tax treatment that DOMA applies to employees who are legally married in states recognizing same-sex marriages and the burdens it imposes on employer sponsors of health and retirement benefits,” said James A. Klein, president of the American Benefits Council, which signed the amicus brief. The council’s members directly sponsor or administer health and retirement benefits.
The brief describes how DOMA “requires that employers treat one employee differently from another, when each is married, and each marriage is equally lawful.” According to an analysis by the council, this disparate treatment creates challenges for both employees and companies sponsoring benefit plans, such as:
• Federal income tax imposed (and the corresponding withholding required) on the value of health benefits for spousal coverage, applicable only to coverage of same-sex spouses (pages 15-16 of the brief).
• Differing eligibility for participation and use of pretax “cafeteria” plans (16-17).
• Differing eligibility for preretirement hardship distributions from retirement plans (20-21).
• Disqualification of same-sex spouses from the estate-tax marital deduction on proceeds from employer-sponsored li