On June 26, 2015, in Obergefell v. Hodges, the Supreme Court of the United States determined that it is unconstitutional for a state to ban same-sex couples from exercising the fundamental right to marry. As a result of this decision, all states are now required to permit same-sex couples to marry and to recognize same-sex marriages validly entered into in other jurisdictions. Immediately prior to the Supreme Court’s decision, 37 states and the District of Columbia permitted same-sex marriage, meaning the impact of the Obergefell decision will be most significant in the remaining 13 states.
The California state legislature recently enacted a law that may affect the taxation of benefits an employer provides to same-sex domestic partners in the state. California AB 362 excludes from gross income for California state income tax purposes the amount of any tax gross-ups paid by an employer to an employee for benefits for that employee’s same-sex spouse or domestic partner. The law was approved by California’s governor on October 1, 2013, and is effective immediately through January 1, 2019.
Earlier this year the Supreme Court of the United States ruled in U.S. v. Windsor that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional (see “Supreme Court Rules on DOMA and California’s Proposition 8” for more). Section 3 of DOMA had provided that, for purposes of all federal laws, the word “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 who is a husband or wife.” Subsequent Internal Revenue Service (IRS) and U.S. Department of Labor guidance clarified that, as a result of Windsor, favorable federal tax treatment of spousal benefit coverage would extend to all same-sex couples legally married in any jurisdiction with laws authorizing same-sex marriage, regardless of whether the couple currently resides in a state where same-sex marriage is recognized (see “IRS and DOL Guidance Clarifies Employee Benefits Impact of Supreme Court’s DOMA Ruling” for more information).
As a result of Windsor and the subsequent IRS guidance, the impact of California AB 362 appears fairly limited. Pre-Windsor, some employers provided a federal tax gross-up on the imputed value of coverage provided to an employee’s same-sex spouse or domestic partner. Post-Windsor, same-sex married couples in California no longer need a tax gross-up for either state or federal tax purposes because they no longer have to be taxed on the value of the coverage provided to their spouse. Because of this treatment, application of California AB 362 would be limited to a situation where an employer provides a federal tax gross-up to an employee who is in a California-registered domestic partnership. Such a gross-up, which would have been taxable under prior state law, is now no longer taxable in California. Employers in California will need to update their payroll and tax procedures accordingly. Employers both inside and outside of California that previously provided tax gross-ups may find it desirable to revisit their gross-up policies in light of the Windsor decision and the IRS guidance.
As a result of the federal Defense of Marriage Act (DOMA), same-sex relationships have not been recognized for any purpose under any federal law, including the Employee Retirement Income Security Act, the Internal Revenue Code and COBRA. Historically, this has created significant implications for the administration of benefit plans covering same-sex partners, including the taxation of health, dental and vision benefits and survivor benefits under retirement plans. Employers that have extended equal benefits to lesbian, gay, bisexual and transgender employees have faced significant administrative and other challenges. Employers that have not extended benefits to same-sex partners have struggled to understand their legal obligations.
Earlier this year, the Supreme Court of the United States heard arguments on the constitutionality of DOMA and on California’s “Proposition 8,” which denies same-sex couples the right to marry in that state. The Supreme Court is expected to issue its rulings in these cases in June. Based on this, McDermott Will & Emery invites you to a webcast to discuss the impact of these landmark decisions on employee benefit plan sponsors and to address key considerations for employer-provided plans, including:
An up-to-date description of the federal taxation of health and welfare benefits
A summary of steps employers must take in light of the Supreme Court’s decisions
What benefits must employers offer to same-sex partners
On March 26 and 27, 2013, the Supreme Court of the United States heard oral arguments in cases challenging the constitutionality of the federal Defense of Marriage Act (DOMA) and California’s Proposition 8. A Supreme Court ruling in either case may have significant implications for employee benefit plans given the many federally mandated spousal benefits that currently do not extend to same-sex spouses in light of DOMA.
On February 7, 2012, the U.S. Court of Appeals for the Ninth Circuit found California’s Proposition 8, which amended the California Constitution to ban same-sex marriage, to be unconstitutional because it violated the Equal Protection Clause of the U.S. Constitution. Supporters of Proposition 8 have vowed to appeal the ruling to the Supreme Court of the United States, and it is unclear whether the entire Ninth Circuit might agree to hear the case en banc.
The lower court had previously held Proposition 8 unconstitutional for two separate reasons: (1) it impermissibly deprived same-sex couples of the fundamental right to marry guaranteed by the Due Process Clause of the U.S. Constitution, and (2) it violated the Equal Protection Clause of the U.S. Constitution because it excluded same-sex couples from state-sponsored marriage while allowing opposite-sex couples to marry. The Ninth Circuit affirmed the lower court, but narrowly tailored its decision to facts specific to California. Because same-sex couples had previously been granted the right to marry and Proposition 8 eliminated that right, the Ninth Circuit limited the question before it to whether California had a legitimate reason to take away same-sex couples’ right to the official status of “marriage,” rather than the substitute label of “domestic partnership.” The Ninth Circuit found no such legitimate reason, stating “Proposition 8 serves no purpose, and has no effect, other than to lessen the status and human dignity of gays and lesbians in California, and to officially reclassify their relationships and families as inferior to those of opposite-sex couples.”
Because the Ninth Circuit’s decision was focused on facts specific to California, the ultimate legal effect of the ruling is likely to be limited to California.
For now, same-sex marriage in California continues to be on hold because the Ninth Circuit affirmed the lower court’s stay pending further appeal. By keeping the stay in place, same-sex marriages will not resume in California until the appeal process runs its course (or until a court lifts the stay). As a result, the immediate effect of the decision on employee benefits is to maintain the status quo. While additional same-sex marriages cannot yet take place, California does recognize the approximately 18,000 same-sex marriages performed in 2008 before Proposition 8 was passed. Further, couples in California can still enter into spousal-equivalent domestic partnerships, meaning employers may have several different types of same-sex relationships to address in their employee benefit arrangements. Employers should keep an eye on further developments in California as litigation surrounding Proposition 8 winds its way through the appeal process. If and when same-sex marriages resume in California, employers will need to carefully review their employee benefit plans and programs to determine what changes are necessary or desirable.
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