The Impact of the Supreme Court’s DOMA Ruling on Health and Welfare Plans

Summary

The recent Supreme Court decisions on same-sex marriage obviously have significant implications for employers in a number of employee-related areas including payroll, retirement and employee benefits. While much has already been written in general about these decisions, this issue brief will focus only on issues related to employer-sponsored health and welfare plans.

Obviously, one of the most immediate and significant effects of the Court’s ruling is the change to the federal tax treatment of certain employee benefits provided to same-sex couples. However, there are a number of other administrative and benefits plan issues employers must address as well as a number of unanswered questions likely to be addressed in upcoming regulatory guidance and possibly additional legislation. Throughout this summary any reference made to a same-sex marriage or same-sex couples assumes a couple legally married by a state that recognizes same-sex marriages.

Employer-Sponsored Health and Welfare Benefits

While the ruling does not automatically require employers to offer coverage to same-sex couples, it is expected that this will now be an active area of litigation and possible future legislation. Many state laws in states that recognize same-sex marriages already include insurance law provisions that impact fully insured health plans. It is important to note that fully insured group insurance contracts are generally subject to the state insurance laws where the policy is issued. Consequently, group insurance policies issued in states that do not recognize same-sex marriage would typically not be required to follow any state insurance laws related to same-sex couples, even for employees covered by the policy who live in a state that does recognize these marriages.

However, one important question left unanswered by the court is which state law is controlling for federal law purposes, the state of the marriage or the state of residence, if different. If the state of marriage is controlling, then employers will need to treat same-sex married couples the same as any other married couple for federal law purposes regardless of where the employee lives. The conservative (and safest) approach for employers, until this issue is resolved, would be to base treatment of benefits for same-sex couples on the rules in force in the state of marriage.

Tax Treatment of Benefits

Prior to the Court’s ruling, employers who chose to offer benefits to same-sex spouses were generally required to treat the benefits provided to those spouses, and their dependents, as taxable income to the employee. Now, health and welfare benefits provided to legally married same-sex spouses will be subject to the same federal tax treatment as any other married couple. Employers may still need to treat these benefits as taxable income to the employee for state tax purposes in states that do not recognize same-sex marriage depending on specific state tax laws.

This change affects employers in a number of ways:

•  Employer paid health benefits provided to married same-sex couples can be provided tax-free and the employer will no longer have to impute additional income to the employee, or withhold additional federal taxes from the employee’s pay to account for the additional income.
•  Employees with same-sex spouses can pay for premiums through a Section 125 plan on a pretax basis.
• The employer will no longer be liable for the additional employer payroll taxes due on the imputed income to employees covering same-sex spouses and their children.

HIPAA Special Enrollment

HIPAA requires group health plans to allow a mid plan-year special enrollment after a marriage to employees who previously waived coverage. This special enrollment privilege must now be extended in the case of a same-sex marriage.

Section 125 Election Change Events

Section 125 restricts an employee’s right to change pre-tax reductions to specific events articulated in IRS regulations. Marriage and divorce are events that can trigger certain change rights under Section 125, which must now also apply to same-sex marriages.

COBRA

COBRA continuation (and many state health insurance continuation laws) allows a divorced spouse to continue coverage. Prior to the Court’s decision, same-sex partners were not entitled to COBRA continuation rights. Now health plans must offer COBRA to same-sex spouses after a divorce or legal separation.

Health FSA, HSA, and HRA Reimbursements

DOMA had meant that employees could not use funds on a tax-free basis from a health FSA, HSA, or HRA to reimburse claims incurred by same-sex spouses and their children. Now claims incurred by those individuals must be treated as eligible expenses in the same manner as claims incurred by family members in opposite-sex marriages.

Dependent Care Assistance Plans

Dependent care account reimbursements under Section 129 dependent care assistance plans contain restrictions related to spouses that will now also apply to same-sex spouses.

• For reimbursements to be made, both the employee and spouse must be gainfully employed or looking for work.
• Annual reimbursements are limited to the lowest of $5000, or the employee or spouse’s taxable income for the year.

HSA Contributions

Total HSA contributions in a year are limited for married couples, even if both individuals carry family contributions. In the past, due to DOMA, same-sex married couples could each contribute up to the maximum HSA contribution allowed based on their level of HDHP coverage. Same-sex couples will now be subject to the same HSA contribution limitations as other married couples.

ACA Premium Tax Credits

The IRS has ruled that family members who are eligible for an employee’s plan will not be eligible for a premium tax credit when purchasing individual health insurance coverage through a public exchange (beginning in 2014) if the cost of single coverage is deemed “affordable” (as defined by the ACA). Prior to this decision, a same-sex spouse could have qualified for the ACA premium tax credit, even if they were eligible for their spouse’s affordable employer-sponsored plan. Now same-sex spouses will be subject to the same rules regarding subsidy eligibility as other married couples.

Plan Document, SPD, and Employee Communication Issues

Employers will need to review existing plan documents, SPDs, and other employee communications and may need to modify language to reflect changes to employee benefit related policies and administration. Guidance is expected on the scope and timing of required changes

Timing

Some of the biggest unanswered questions for employers relate to the timing of changes due to the Court’s decision. Current law gives the IRS authority to apply the decision prospectively only, and the IRS has limited retroactive application of previous Supreme Court decisions. However, the timing of the decisions application to other federal laws, such as ERISA, is less clear, and guidance is expected from the appropriate regulatory agencies (such as the DOL and HHS).

Important timing questions that remain to be answered include but are not limited to:

• Tax treatment of benefits – will same-sex couples be allowed to apply for refunds on taxes previously paid and will employers be allowed to apply for refunds of previously paid employer payroll taxes?
• When must necessary plan document changes be made?
•  Will plan reimbursement related issues such as using existing health FSA funds for the claims of a same-sex spouse apply retroactively?

Summary

In the short term, the Court’s decision generates many questions for employers as they attempt to administer their benefit plans. Initially, regulators are likely to take a flexible approach for at least some period of time. However, this does not preclude an individual from pursuing legal action if they feel their rights have been violated by the employer. Consequently, employers should proceed cautiously in implementing any changes to existing benefits policies and procedures.

While significant additional guidance is expected, regulatory agencies are already struggling to provide necessary guidance related to the implementation of the Affordable Care Act, so it may be unrealistic to expect considerable clarity any time soon.

If you have any questions about this subject, please contact your Parker, Smith & Feek Benefits Team.

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