Say Goodbye to Imputed Income - SCOTUS Ruling's Impact on Small Business
With the recent Supreme Court of the United States June 26, 2015 ruling (Obergefell v Hodges) overturning same-sex marriage bans in four states, in Michigan, Kentucky, Ohio, and Tennessee, employers are now faced with again changing rules regarding how to treat employee benefits and how to charge them to employees in same-sex marriages. Depending on how your business is structured, public or private, and how your business pays for health insurance, self-funded or fully insured, the rules may vary.
“Public employers, such as state and local governments are going to be required to recognize same-sex spouses and treat them the same way they treat opposite-sex spouses for benefit purposes,” says Tami Simon, managing director for Buck Consultants at Xerox. She views the ruling as a simplification for businesses who may even find additional cost savings due to less administration.
Conversely, private employers, while not necessarily legally required to recognize same-sex marriages, may face law suits of discrimination and claims under Title VII of the Civil Rights Act of 1967. Those employers with self-insured plans may have the flexibility to not offer benefits to same-sex spouses, however, they may also find themselves in the cross-hairs of the justice system accused of discrimination practices. It’s a fine line between fair treatment and moral judgment. Eligibility rules for employer-provided benefits may also change, where employers may elect to drop coverage offerings for same and opposite-sex domestic partners and provide coverage only for legally married couples. Further guidance and rule changes will abound in the coming months.
Additionally, employers will need to examine how and if they need to continue imputing income on same-sex benefits. Rulings from the IRS and the Department of Labor after the 2014 Supreme Court pronouncement in Windsor were conflicting. The IRS took at “place of celebration” position that couples were validly married in a state that recognized same-sex marriage were viewed as ‘married’ for tax purposes regardless of where they resided. The Department of Labor assumed a “place of residence” position that the ‘marriage’ was recognized only in states that legally recognized the marriage and in which the couple currently resided. Not an easy road for couples or employers to walk. June 2014, the DOL reversed its decision and joined ranks with the IRS in recognizing the marriage regardless of state domicile. In states where same-sex marriage was not previously recognized, benefits were subject to state taxes. Companies and states will need to review these benefits to determine if they need to continue to maintain the same programs now that all employees can legally marry in every state. Previously, employers in states that did not recognize same-sex marriage would have to withhold state and federal income taxes differently – one withholding rate for a married couple for federal taxes and another single rate for state income taxes. Additionally, employers who were providing health insurance benefits to employees with same-sex spouses will no longer need to count the value of those benefits as income (impute the income) under state laws and then exclude it from federal tax calculations.
In a recent ERISA Industry Committee survey, “70 percent of employers surveyed said they wouldn’t drop the benefits that currently offered domestic partners if the Supreme Court ruled the way it did on June 26, 20015.” Conversely, about 25 percent of those employers surveyed said they would. Now employers need to take a hard look at their benefits and decide what streamlining might mean to both their bottom line and their employees. State laws need to catch up with Federal law regarding how income is treated for domestic partners versus same-sex married couples, and when those states not offering same-sex marriage will begin to recognize it. Until those changes have trickled down to the respective states, it’s important to keep abreast of the rules in your state on imputed income.
In community property states like California, Arizona and Texas, assets earned by one spouse are generally considered ‘community property’ and therefore the property of both spouses in the marriage. The Supreme Court’s ruling expands marriage to same-sex couples affords them the same rights in the eyes of the courts with regard to marriage, divorce, adoption, bankruptcy, taxes and benefits. It will be increasingly more important for same-sex couples to speak with an accountant and an attorney to be sure that they have all of their bases covered. As with any major change in federal law and attitude, real change takes time. “You should still carry your travel documents – your marriage certificate, durable power of attorney, your health-care proxy,” says Stuart Armstrong, a certified financial planner with Centinel Financial Group. Couples may still face resistance and only time and persistence will change that. More guidance will be forthcoming, but a definite streamlining under the guise of ‘marriage’ and all the rights and privileges is on the horizon.
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Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.