Although the Supreme Court only recently has taken up the constitutionality of same-sex marriage, it's important to remember the area of domestic partner employee benefits began to grow in the early 2000s. During this period, large employers began to voluntarily offer health coverage to same-sex domestic partners. This benefit slowly became popular and began to grow among midsize and smaller employers.

Federal law does not recognize same-sex relationships under the 1996 Defense of Marriage Act, which defines marriage as the union between heterosexual couples. Thus, when an employer provides employer-subsidized health coverage to a same-sex partner, the cost of the subsidy is imputed into the employee's income for federal income, FICA and FUTA taxes. However, the state income tax implications vary greatly. Recent changes have taken place in:

* California. California has long recognized the status of registered domestic partners and does not tax imputed income for health insurance purposes.

* New Jersey. Effective July 2004, New Jersey state government employers were required to make health coverage available to same-sex partners under the New Jersey Domestic Partner Act. These benefits were required whether they were provided under a fully insured or self-insured health program. In 2007, New Jersey became the third state to institute civil union relationships. New Jersey employers with fully insured health plans are required to cover civil union partners. However, employers with self-insured health plans were still not required to offer health coverage to civil union partners. For self-insured programs an issue always exists whether a state may require an ERISA plan to provide certain benefits or whether ERISA preempts the state statute. This issue must be periodically considered.

The New Jersey Department of Taxation ultimately held that New Jersey will not tax employees for any imputed income attributable to the employer subsidy for civil union coverage.

* New York State. The New York Marriage Equity Act became effective in July 2011. The New York Department of Taxation and Finance provides that no imputed income will exist and New York State employers are not required to withhold state and local taxes on the value of benefits provided to same-sex married couples.

* Maryland. In Maryland, same-sex partners have been able to receive marriage licenses since Jan. 1. Employer coverage for same-sex married couples is believed to be tax-free. However, unless state tax laws are changed, same-sex domestic partners will have imputed income for the cost of health coverage.

* Washington state. Same-sex partners became eligible to be married in Washington in December 2012. Since Washington does not have a state income tax, there is no impact on same-sex relationships.

* Maine. Same-sex partners were eligible to become married in Maine on December 29, 2012. For purposes of health coverage, Maine will not tax imputed income even though it's taxed under federal law.

* Colorado. In March, the state's Civil Union Act was passed and became effective May 1, with certain provisions for health insurance effective as of Jan. 1, 2014. The act provides that civil unions between same-sex or opposite-sex couples receive their same rights and protections as if married, but acknowledges that unions are not a marriage. The state constitution continues to limit marriage to opposite-sex couples. Health and life insurance policies issued or renewed in Colorado after Jan. 1, 2014, are required to cover civil union partners as a dependent, in the same manner as required in New Jersey. However, Colorado will follow the federal tax laws.

The important issues for employers to consider in evaluating same-sex benefits are:

1. Ensure that any employer subsidy for same-sex benefits is properly imputed into the income of an employee for federal income, FICA and FUTA taxes.

2. Confirm that the payroll system or outside providers may include or exclude the subsidy for purposes of state taxation, where applicable.

3. Confirm that employee contributions for same-sex benefits are paid for with after-tax payroll deductions and not on a pretax basis.

4. Review the definition of compensation for qualified retirement plans to ensure that the imputed income for same-sex benefits is either included or excluded in calculating retirement benefits, as desired by an employer.

5. Ensure that the recordkeepers and/or actuaries for any qualified retirement plans are aware of any changes in the definition of compensation to administer all retirement programs in accordance with the terms of the applicable plan documents.

Contributing Editor Frank Palmieri, CPA, J.D., LL.M, is a partner with the law firm Palmieri & Eisenberg.

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