Same-Sex Marriage Ruling: How Costly?

Many companies will see modest new benefits-related costs as a result of the Supreme Court's ruling that struck down the Defense of Marriage Act.

Today’s Supreme Court ruling that the Defense of Marriage Act (DOMA) is unconstitutional will raise benefits costs for many employers. But the impact is expected to be modest and certainly won’t be at a level that could be considered material.

DOMA, enacted in 1996, defined marriage as “a legal union between one man and one woman as husband and wife.” That was unconstitutional, the high court ruled, “as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment.”

Under the law, the federal government was prohibited from recognizing same-sex marriages, even in states where such marriages were lawful, in relation to any federal purpose. Such purposes include dependent health coverage under the Affordable Care Act (ACA), retirement benefits under the Employee Retirement Income Security Act (ERISA), and federal income taxation.

Today’s ruling removes that prohibition with regard to same-sex married couples in the states where such marriages are lawful: Connecticut, Delaware (as of July 1), Iowa, Maine, Maryland, Massachusetts, Minnesota (as of Aug. 1), New Hampshire, New York, Rhode Island (as of Aug. 1), Vermont and Washington, as well as the District of Columbia

Companies that do not offer health benefits to same-sex spouses don’t have to change that policy. The ACA provision under which employers must offer health benefits to employees and their dependents or pay a federal penalty doesn’t define “dependents” as including spouses. But following the court decision, children of same-sex spouses in the applicable states must now be eligible for coverage, notes Fredric Singerman, an attorney with Seyfarth Shaw.

Human-resources consulting firm Aon Hewitt tells CFO that in its database of 1,300 large and midsized employers, 71 percent offer benefits for same-sex spouses (and, usually, same-sex domestic partners). Smaller companies may be more likely to deny the coverage and therefore also more likely to feel a new cost pinch.

Another potential cost hit, applicable to all employers, involves death benefits under defined-benefit pension plans and 401(k) plans. Some such plans stipulate that a death benefit is payable only to a spouse. Now, of course, more such payouts will have to be made.

It’s unclear so far whether death benefits will be payable to a same-sex couple that moves from a state where their marriage is legal to one where it isn’t. “If a couple moves from New York to Texas and the plan participant’s spouse passes away there, what happens to the death benefits?” says J.D. Piro, the leader of Aon Hewitt’s health law practice.

Almost all employers will have to absorb some administrative costs. For example, until now the value of health benefits for same-sex spouses of plan participants and their dependents was taxable. That will still be the case in states where same-sex marriages are unlawful. But employers will have to “go back and rejigger the tax treatment for those people” in the jurisdictions where such marriages are allowed, Singerman says.

On the plus side of that issue, Singerman suggests that employers may be able to file for tax refunds. “It seems to me they should be able to. They’ve been paying FICA tax on those benefits, but under the decision it was unconstitutional for the IRS to treat same-sex spouses differently from opposite-sex spouses in this regard.” Refunds potentially will be available for taxes paid in the past three years, Singerman says.

There could be a fair-sized range of other administrative costs with respect to employees in the jurisdictions where same-sex marriages are legal. “If marital status affects the delivery of benefits to an employee’s same-sex spouse or that spouse’s child,” says human-resources consultancy Mercer, employers may need to: amend the benefits plan’s definition of “spouse”; reprogram tax-reporting systems; and update enrollment forms, distribution-election forms, tax notices, beneficiary designation forms, summary plan descriptions, and the like.

Other steps may involve revisiting domestic partner policies and evaluating whether DOMA “workarounds” adopted in the past are still needed to achieve human-resources objectives.

Despite the added costs, the American Benefits Council, which represents the interests of about 380 mostly large employers on employee benefits issues, applauded the Supreme Court ruling. “DOMA imposed unequal federal tax treatment on workers covered by employer-sponsored benefit plans,” said James Klein, the council’s president. “Many more employers can now focus on providing benefits in a way that helps them achieve their core business goals.”

And despite the variety of new costs, they probably won’t add up to a burdensome total for any particular employer. “I think it’s fair to say the costs aren’t going to be large,” says Singerman.

Photo credit: Creative Commons Attribution 2.0 Generic Fibonacci Blue

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