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Thursday, September 1, 2011

Now that same-sex marriage is recognized in New York, what steps do employers need to take with respect to employee benefits? The to-do list must consider the federal Income Tax Code, ERISA, insurance law and of course New York’s Marriage Equality Act (“Act”), which took effect July 24, 2011. This is the first in a series of posts that will discuss this topic.

The Act recognizes all legally performed marriages between same- and opposite-sex couples, whether the marriage took place in New York or elsewhere. This means that same-sex marriages, even those entered into under the laws of another state, must be treated equally under the laws of New York.

For starters, let’s consider the federal income tax implications. Because of the federal Defense of Marriage Act (“DOMA”), same-sex marriages are not recognized for federal income tax purposes, so same-sex spouses cannot file a joint federal return. However, according to a technical memorandum from the New York State Department of Taxation and Finance, New York same-sex married couples must file a joint state return and, in doing so, compute their New York state income taxes as if they were married for federal purposes. Couples must complete a federal income tax return (let’s call this the “faux return”) using a married filing status for the sole purpose of completing their New York income tax return.

In the benefits world, the tax treatment of employer-provided health care is a key difference between federal and state income taxation for same-sex married couples in New York. If a same-sex spouse is covered under an employee’s employer-sponsored group health plan, the cost of that spouse’s coverage is excluded from income for New York state tax purposes, but must still be included for federal purposes. Employers have been instructed by the New York State tax authority not to withhold New York State, New York City, or Yonkers income tax on certain benefits provided to a same-sex married employee. When completing W-2s, employers must add the value of that coverage to reported compensation. Affected employees will need to know the value of that coverage so that they can reduce their federal income on their “faux return.”

Employers are reminded that an employee cannot pay premiums for a same-sex spouse on a pre-tax basis through a Section 125 cafeteria plan. Similarly, if a health care flexible spending account (also known as an “FSA”) benefit is offered, medical expenses of the same-sex spouse cannot be reimbursed.

Next week, we’ll look at potential implications on employers’ administration of COBRA, HIPAA special enrollment rights and FMLA for same-sex married couples in New York on account of the Act.

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