Companies get little guidance on taxes, benefits after gay-marriage decision
- September 27, 2013
On June 26, the Supreme Court struck down a key provision of the Defense of Marriage Act (DOMA), ruling that couples in same-sex marriages have the same right to equal protection under federal law as opposite-sex spouses.
The decision was a huge victory for gay rights. For businesses that have employee benefit programs that include spouses, however, the decision may be remembered as the source of an awful headache. Or maybe not. No one can say for sure just yet.
The court’s decision certainly qualified to be called a “landmark.” Nevertheless, its ruling was narrow, because it did not address the part of DOMA that allows states to refuse to recognize same-sex unions. The upshot is that gay marriage, although now legal on a federal level, continues to be illegal in 37 states, including Virginia. That’s a problem.
Another problem is that the justices provided federal agencies with no guidance for compliance with their ruling, even though tens of thousands of government regulations touch upon marital rights. Nor has the Obama administration been especially forthcoming with advice.
The result is that changes to federal laws are being made on a piecemeal basis and within no particular time frame. For example, it took until August for the State Department to announce that it would give same-sex spouses the same preferential treatment for visas that it has granted to opposite-sex couples. A few weeks later, the Internal Revenue Service announced that it would allow joint filings for same-sex married couples regardless of their state of residence.
In early September, the Defense Department said that military same-sex couples would receive the same federal benefits as heterosexual couples. Gov. Bob McDonnell followed suit, extending federal benefits to legally married, same-sex spouses of members of the Virginia National Guard despite the protests of Republican Delegate Bob Marshall.
Experts are left to guess
For employers, this scattershot situation gives new meaning to the phrase “state of confusion” — or perhaps “states of confusion” would be a more appropriate description. How are they supposed to alter their policies on employee benefits — which may encompass retirement and pension plans, health insurance and family leave — when federal and state laws concerning their obligations to same-sex spouses are unclear, inconsistent or outright contradictory?
Even the experts are left to guess.
“We are advising our clients to monitor the situation and wait until more is known,” says David Barney, vice president of the Lynchburg-based Scott Benefit Services. “The Supreme Court’s decision has created some inequalities.”
Bruce Elliott, manager of compensation and benefits for the Society for Human Resource Management, a nonprofit association based in Alexandria, says he is awaiting guidance, too, although he predicts that it will be slow in coming. He also expects that the battle over same-sex marriage will continue to be waged at a state level.
The issue is, for instance, a flashpoint for the commonwealth’s gubernatorial candidates. Republican Attorney General Ken Cuccinelli filed a brief with the U.S. Supreme Court supporting Proposition 8, a California ballot initiative that banned gay marriage there after it was legalized by the state’s supreme court. (The U.S. Supreme Court struck down Proposition 8, dismissing an appeal of a lower court decision that found it unconstitutional.) Former Democratic National Committee Chairman Terry McAuliffe supports gay marriage but has said repeal of Virginia’s ban, contained in a constitutional amendment, would not be one of his legislative priorities.
Further litigation over the issue nationwide is expected. The American Civil Liberties Union, the ACLU of Virginia, Lambda Legal and the law firm Jenner and Block filed a federal class-action lawsuit in August challenging Virginia’s ban. In addition, the Supreme Court did not specify whether its ruling would be retroactive, so suits seeking financial redress for previous discrimination are probable.
Payroll department ‘nightmare’
In the meantime, Elliott says, the administration of employee benefit programs, never a simple task, could become “hell.” Barney opted for the word “nightmare.”
Some businesses will be lucky and should be able to conduct business as usual. Those that are wholly within states in which same-sex unions already were legal, for example, should not have to make any changes to their benefit programs — as long as all their employees live in-state. The less-lucky, though, may include businesses in states that do not recognize gay marriage, businesses that have employees who live in states that do not recognize gay marriage, and businesses that have offices in several states that may have varying policies on gay marriage or that have employees working overseas.
Elliott offers a theoretical case that demonstrates the mess the Supreme Court decision has created.
Say, a company offers a health-care subsidy for employee spouses, a common benefit. That subsidy for opposite-sex couples has been exempt from state or federal taxation. Before the court ruling, however, if a business extended that subsidy to a same-sex spouse, it was considered “imputed” income for the employee and was taxed by both the federal and state governments.
Now, the subsidy for a same-sex spouse won’t be subject to federal taxes, but it still could be taxed by states that don’t recognize gay marriage. Clearly, keeping track of what to withhold from whom could keep a payroll department working overtime.
Or, say that a business is located in a state that does recognize same-sex unions, such as Maryland, but the employee and his or her same-sex spouse, who were legally wed in the District of Columbia, live in Virginia. Does the business follow Maryland law and treat the same-sex partner as a legal spouse, or does it treat the employee as not legally married because income taxes traditionally have been levied according to place of residence, and Virginia does not recognize gay marriage?
And if the company has offices in several states, will it determine its employees’ spousal benefits on a case-by-case basis? And would a company have to change its withholding if it transferred an employee in a same-sex marriage from a state that recognizes gay marriage to one that doesn’t, or vice versa?
“This is about as complex a ruling as it can get,” Elliott says. He assumes that some companies will let employees sort out their own tax situations, although human resources departments still would be responsible for figuring out how the court decision affects other benefits that include same-sex spouses such as annuity retirement plans and family leave policy.
Easiest route: same benefits
Many multistate companies likely will take the easiest route, Elliott says, and extend the same benefits to all employees regardless of where they live or to whom they are married.
That practice already is the case for Northrop Grumman, the giant defense contractor based in Falls Church.
“Like other employers, we are awaiting federal guidance regarding DOMA’s impact to the many federal laws in which marital or spousal status is addressed,” says Randy Belote, the company’s vice president for strategic communications. “However, we do know that several aspects of this decision will not result in a change for Northrop Grumman employees and retirees because … the company already provides many benefits to domestic partners and same-sex spouses.”
Whatever route businesses find best for dealing with the DOMA decision, two facts about gay marriage should mitigate their travails.
First, gay marriage is a recent phenomenon. Massachusetts was the first state to legalize same-sex marriage in 2004, so obligations that may be determined to be retroactive should not be financially overwhelming.
Second, the number of married same-sex couples, remains small. According to the U.S. Census Bureau, the country has about 168,000 same-sex couples; so again, Elliott and Barney expect the additional financial burden associated with the decision to be minimal. Figuring out how to administer the new benefits is the issue.
Until more guidance is forthcoming, though, many employers are in standby mode. Barney recommends that they make use of the delay by reviewing their benefit and payroll policies and communicating with their employees about their progress and intentions concerning compliance with the new law. That won’t mean that they escape from this potential headache, but at least they’ll have the equivalent of aspirin on hand.