NEW YORK RECOGNIZES SAME-SEX MARRIAGE

July 2011

INSIGHT

On June 24, 2011 New York Governor Andrew Cuomo signed the Marriage Equality Act (MEA) which will allow same-sex civil marriages in New York State beginning July 24, 2011. New York becomes the sixth (and largest) state to allow same-sex marriage, joining Connecticut, Massachusetts, Iowa, New Hampshire, Vermont, as well as the District of Columbia. The enactment of the New York law focuses renewed attention on the many domestic partner and same-sex marriage employee benefit plan challenges facing employers and plan sponsors.

IMPLICATIONS

The employment, tax and benefit plan issues with regard to same-sex marriage are complex; employers and plan sponsors should work closely with legal, tax and benefits advisors to ensure continued compliance with all relevant laws. Some issues in this regard include:

Federal laws such as the Employee Retirement Income Security Act (ERISA), the Defense of Marriage Act (DOMA) and provisions of the Internal Revenue Code (IRC) continue to impact same-sex spousal benefits and factor into the treatment of benefits for these couples.
Understanding the complex interaction between state and federal law pertaining to employee benefits (including same-sex spousal benefits) is critical.
Insured plans, generally governed by both state and federal laws, are affected differently than self-insured plans.
Self-insured plans, in many instances, are not required to comply with state laws (that affect benefit plans) such as MEA.
New York and other employers may need to adjust payroll and deduction elections (which may now be different for state and federal tax purposes), modify benefit plan provisions and accompanying administrative forms as well as communicate any changes to employees.

More on the Federal Laws

The Employee Retirement Income Security Act (ERISA) - ERISA generally preempts state employee benefits law and as a result, self-insured plans are not required to comply with many state laws such as MEA. Self-insured plan sponsors should review benefit plan documents and communications with a critical eye to make sure the definition of “spouse” is in line with organizational objectives. For example, plan sponsors that wish to extend coverage to domestic partners and same-sex spouses should ensure the plan’s definition of a “spouse” is as intended.

The Defense of Marriage Act (DOMA) - The Defense of Marriage Act is a federal law which 1) states that no individual state can be forced to recognize a same-sex couple’s marriage from another state, and 2) defines "marriage" as exclusively the union of one man and one woman for all purposes under federal law. While a same-sex spouse may be entitled to certain rights and benefits in a given state, as a result of DOMA, that same relationship will not be recognized and granted spousal protections under federal law and may not be recognized by other states.

The Internal Revenue Code - Tax-favored spousal benefits and protections granted under the Internal Revenue Code (IRC) will not apply to same-sex spouses. Employers may not provide tax-favored pension or health care benefits to a domestic partner or same-sex spouse (and their dependents) unless these individuals are considered Qualifying Relatives as defined in IRC Section 152.

Impact on Health & Welfare Plans

On November 21, 2008, the New York Insurance Department issued Circular Letter No. 27 stating that New York insurers are required to recognize the marriages of same-sex couples performed in jurisdictions that legally perform these unions. As a result, insured plans subject to New York insurance law (including accident, health, life and disability) were required to extend coverage to a same-sex spouse in the same manner as an opposite sex spouse. With the passage of MEA, New York now “joins the list” of jurisdictions that legally recognizes same-sex marriage to which Circular Letter No. 27 applies.

Continuation of Coverage - A domestic partner (or same-sex spouse) is not considered a “spouse” with the right to continue coverage under (federal) COBRA in a fully-insured or self-insured plan. New York insured medical plans must provide 36 months of state continuation coverage for 1) small group plans not subject to federal COBRA (generally less than 20 employees) and 2) extend additional benefits for 18 months to qualified beneficiaries who exhaust their benefits under federal COBRA (maximum total coverage of 36 months). It appears that same-sex spouses covered by an insured plan issued in New York would be eligible for 36 months of state continuation benefits even if the employer is subject to federal COBRA, as the same-sex spouse is not otherwise entitled to federal COBRA continuation of coverage benefits. This would only apply to medical benefits and does not automatically extend to stand-alone dental and vision plans. State continuation provisions vary in each state and plan sponsors should review relevant requirements.

Extending Coverage To Young Adult Children – Under the Affordable Care Act, plan sponsors of fully insured and self-insured plans must extend coverage to young adult dependents up to age 26 (with certain exceptions for grandfathered plans). Unless the young adult dependent meets the federal definition of a “child” under the IRC (son, daughter, stepchild, foster or adopted [or being placed for adoption] child), the plan may impose restrictions, such as age and continuing higher education, on these dependents. It would appear that insured plans issued in New York would only be required to cover dependents of same-sex spouses in accordance with the New York extension of coverage through age 29 requirements. Other options and applications may be available and plan sponsors should carefully review how they wish to apply dependent coverage with their Chernoff Diamond consultant.

Electing Healthcare Benefits – In accordance with federal tax rules, benefits for domestic partners and same-sex spouses may not be paid for with pre-tax dollars and the value of the benefits must be imputed as income. However, the treatment of same-sex spouses under state law may differ from federal requirements. For example, it may not be necessary to impute the value of healthcare benefits as New York state income for legally recognized same-sex spouses and dependents. It is important to note that each state that recognizes same-sex marriage may have different tax implications; therefore, it is important to review these issues with tax and legal advisors and to direct all individuals to seek personal tax guidance, as well.

Tax-Favored Accounts - Reimbursements and distributions from tax-favored accounts such as flexible spending accounts, health reimbursement arrangements and health savings accounts are not extended to same-sex spouses and their dependents.

Supplemental Insurance - Supplemental insurance policies issued in New York must extend the option of electing spousal coverage to same-sex spouses. As New York now joins the list of jurisdictions that recognize same-sex marriage, this requirement would apply to same-sex couples who legally marry in New York.

Impact on Retirement Plans

There will be minimal impact to retirement plans as a result of any state legislation that recognizes same-sex marriage as retirement plans are generally governed by federal laws including ERISA and DOMA.

Spouse Beneficiary - A same-sex spouse will not be recognized as a “default spousal beneficiary” entitled to certain protections in a retirement plan. A participant who enters into a same-sex marriage must designate the same-sex spouse as their beneficiary in order to be granted beneficiary rights and benefits.

Qualified Joint and Survivor Annuity (QJSA) – A same-sex spouse would not be entitled to automatically receive the rights and benefits of a Qualified Joint & Survivor Annuity distribution under a retirement plan. Plan sponsors would need to amend the plan in order to provide a QJSA to a same-sex spouse. A participant with a same-sex spouse would, however, be eligible to rollover a benefit into an IRA, other qualified retirement plan, or take a lump sum distribution in cash without spousal consent.

Some Closing Thoughts

Employee benefit plan issues are complex and will evolve through the legislative and judicial process. Employers and plan sponsors should continually review their overall benefits philosophy and understand that, while the laws provide the framework for compliance, your organization may provide benefits and options that are more generous than required. For example, many organizations voluntarily extend COBRA privileges to domestic partners and same-sex spouses even though it is not required under federal law. Other companies have taken steps to “gross up” an employee’s pay when imputed income is required. Your Chernoff Diamond consulting team can help you analyze the impact of MEA on your benefit program to design and implement an overall benefits strategy that fits with your objectives.

ADDITIONAL INFORMATION

For specific questions concerning information contained in this INSIGHTS & IMPLICATIONS, please contact your Chernoff Diamond consultant.

Information contained in this INSIGHTS & IMPLICATIONS is not intended to render tax or legal advice. Employers should consult with qualified legal and/or tax counsel for guidance in respect of matters of law, tax and related regulation.

Chernoff Diamond provides comprehensive consulting and administrative services with respect to all forms of employee benefits, risk management and qualified and non-qualified retirement plans.

For additional information about our services, please contact us at 516.683.6100 or via e-mail at .(JavaScript must be enabled to view this email address).