On Thursday, May 15, 2008, I published an update on the California Supreme Court’s decision lifting the ban on gay marriages (2008-8). In less than an hour of its release, I received numerous questions about the impact of this decision on the current income tax treatment of health care benefits by employers for Domestic Partners in California and nationally.

In Brief

1.       Federal Law. It is presumed that the federal rules regarding taxation to non-employee Domestic Partners and same sex spouses will remain as they are currently.

2.       California Law. Absent some immediate action by the California legislature, the Domestic Partner laws allowing tax-favored treatment of couples using the (Domestic Partner) State Registry remain as they are currently.

Discussion

1.       Federal Law. The federal law fails to recognize any homosexual relationship for tax purposes due to the 1996 passage of the Defense of Marriage Act (DOMA). Under that law, “spouse” is defined as “a person married to the opposite sex who is husband and wife,” and defines “marriage’ as between “one man and one woman.” For example:

a.       IRC Section 125 Plans. As previously, an employee in a Domestic Partner relationship can only make pre-tax contributions for health care coverage for himself/herself. He/she cannot make pre-tax contributions to obtain coverage for a same sex partner/spouse. The value of that coverage is taxable as income.

b.       Federal COBA. Neither Domestic Partners nor same sex spouses will be qualified beneficiaries for purposes of federal COBRA. Note, California small group COBRA does recognize Domestic Partners as Qualified Beneficiaries in applying small group COBRA law.

c.       Family Medical Leave Act (FMLA). This federal law does not permit an employee to take time off to care for his or her Domestic Partner. Applying the rules of DOMA, FMLA will not be available for the care of a same sex spouse.

2.       California Law. At present, California law requires insurers and health care service plans to make benefits available to Registered Domestic Partners. It is silent as to same sex spouses. One might infer, that for California purposes, the Supreme Court ruling would treat same sex spouses as legal spouses for purposes of policies issued in California, absent policies filed with California regulators defining spouse pursuant to federal law.

3.       Self-funded Plans. Under the theory of ERISA pre-emption, health plans located in California but not insured, are not subject to California insurance law (including Knox Keene). As a result California cannot require self-funded health plans to offer coverage to Registered Domestic Partners. Arguably, self-funded health plans have no duty to recognize same-sex spouses. However, the issue may be disputable at the employer level but not at the ERISA governed benefit plan level.

I will keep you informed of further developments.

Copyright © 2008 Alfred B. Fowler, Attorney at Law.
All Rights Reserved. Reprint with permission only.
This legislative update is published as an information source for our clients and colleagues.
It is general in its nature and is no substitute for legal advice or opinion in any particular case.
 

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of ( i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.