Tax Law

Why Tax Same-Sex Couples on Employer-Provided Health Benefits?

This past week marked a significant change in the area of hospital visitation rights.  Under new regulations implemented by President Obama, hospitals that participate in Medicare and Medicaid programs (i.e., most U.S. hospitals) must allow patients to decide visitation rights, as well as who will make medical decision for them, regardless of sexual or gender orientation.  The new rules are intended to address the fact that some hospitals have often refused visitors who are not related to an incapacitated patient by blood or marriage.  In addition, many hospitals have refused to respect same-sex couples' efforts to designate a partner to make medical decisions for them if they were rendered seriously ill or injured.

Same-sex couples face discrimination in other areas and this writer feels strongly that lawmakers should take action to address these deficiencies elsewhere.  Consider for example, the tax treatment of employer-provided health benefits when it comes to same-sex couples.  Employers may decide to include same-sex spouses, domestic partners, or civil union partners for coverage in their benefit plans.  Ultimately though, it is the federal tax code that determines whether these provided benefits qualify for the exclusion from gross income or for treatment as an itemized deduction.  See IRC §§ 105, 106, 213(d).  Although some states recognize same-sex marriages, there is a uniform definition of "spouse" for purposes of the U.S. Code, and this does not include same-sex spouses, domestic partners or civil union partners.  See 1 USCS § 7 (added by the federal Defense of Marriage Act (DOMA) in 1996).   ERISA also preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." 29 USCS §1144 (ERISA § 514). 

In short, although the federal income tax code provides an exclusion from income for benefits received by recognized family members of an employee, this ultimately does not include same-sex spouses, domestic partners, or civil union partners.  The benefits received by a same-sex spouse or partner are therefore imputed into the employee-spouse's gross income for federal tax purposes.  If conditions are right in a given year, an employee in a same-sex marriage could potentially file a dependency tax form to declare a same-sex spouse as a dependent.  See IRC § 152(a)(2).  But this requires meeting the required conditions and does not address the greater issue of disparate treatment of same-sex spouses or partners. 

To make matters more complicated, if a state affords an exemption for employer-provided healthcare benefits granted to a same-sex spouse or partner, any income imputed to an employee-spouse for federal tax purposes must be taken out of the employee's federal reported wages before the state tax calculation.   An additional federal tax form may also need to be completed to demonstrate the calculation of tax less the imputed benefit income.  So even in states that attempt to give equal treatment to same-sex couples, additional steps must be taken in order to derive equal benefit. 

Absent a repeal of the DOMA and the U.S. Code-mandated definition of "spouse," the disparity discussed above could be remedied by utilizing a revised definition for purposes of the Internal Revenue Code and ERISA so that same-sex couples receive the same federal income tax treatment provided to opposite-sex married couples.  President Obama is on a bit of a roll with respect to gay rights given the recent repeal of the "don't ask, don't tell" military service policy and now with the revised hospital visitation policies.  Perhaps a remedy for the disparities facing same-sex couples under the federal income tax code is also on his list.

For further discussion on this issue and state-specific examples, see Barry Kozak, "Domestic Partnership and Same-Sex Spouse Issues With Employer Provided Health Benefits: The Intersection of Federal Income Tax Principles With Individual State Income Tax Regimes," 1-1E NYU Review of Employee Benefits § 1E.03 (Matthew Bender 2010).

For more information on the tax treatment and exclusion from income of employee healthcare benefits in general, see:

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