Supreme Court Same-Sex Marriage Decision  – What Are The Implications to Self-Funded ERISA Plans?

On June 26, 2015, the United States Supreme Court, in Obergefell v. Hodges, struck down all state bans on same-sex marriage. Previously, in 2013, the Supreme Court ruled, in United States v. Windsor, that federal law must recognize a same-sex marriage that was valid under state law.

The Obergefell decision will have little impact on federal government plans since the IRS and US DOL have recognized same sex marriages for federal tax purposes and benefit law since Windsor.

For private and state and local government entities that sponsor self-insured health benefits, this decision raises issues about what changes, if any, need to be made as a result of this decision. The answer may differ based on whether the employer previously offered benefits to same-sex spouses, did not offer benefits to same-sex spouses, and/or offered benefits to Domestic Partners.

Employer previously offered coverage to same-sex spouses
Employers that already offered health benefits to same-sex spouses will not be significantly affected by the Supreme Court decision, especially if they operate in states that recognize same-sex marriages. Prior to this decision, health benefits may have been subject to state income taxes in states that previously only allowed a tax exemption for opposite sex spouses. Now, state income tax withholding will need to be changed to reflect the fact that same-sex spouses are to be treated for tax purposes the same as opposite sex spouses.

Employer previously did not offer coverage to same-sex spouses
The Supreme Court found that a state’s ban on same-sex marriage violated the equal protection clause of the 14th amendment. Since the equal protection provision pertains to state and federal government, state and local governments that offered coverage only to opposite sex spouses will now have to extend coverage to same-sex spouses.

What about a self-funded health plan sponsored by a “for profit” or “non-profit” employer? For non-government plans, the Obergefell decision does not directly affect private entities, such as an employer sponsored ERISA plan. In addition, ERISA preemption of state law does not appear to be affected.

However, employers who offer coverage to opposite sex spouses, but not to same-sex spouses, could risk a sex discrimination lawsuit. The EEOC (The Equal Employment Opportunity Commission) has taken the position that employer discrimination against a lesbian, gay, bisexual or transgender employee is a type of sex discrimination. If this position is backed by the courts, employers who offer health coverage to opposite sex spouses will need to extend the same coverage to same-sex spouses.

The biggest impact on private employers will be growing employee expectations that employer sponsored benefits should be extended to same-sex spouses.  Hopefully, in the near future, the IRS and US Department of Labor will issue guidance in light of the Obergefell ruling.

Employers who offer coverage to domestic partners
Prior to this decision, many employers offered coverage to an employee’s same-sex domestic partner. For many employers, offering coverage to domestic partners is difficult to administer. For one thing, it is difficult to document a domestic partnership. Some employers are concerned that an employee could enter into a domestic partnership just to obtain health coverage for another individual, something that would be difficult for married couples to do. In addition, most domestic partners are not recognized under federal or state tax income tax laws. Employers generally must impute the value of the domestic partner coverage on the employee’s W-2 and the employee must pay income taxes on the value of the coverage. Finally, employers who continue to offer same-sex domestic partner coverage may face charges of discrimination if they do not extend an offer of coverage to an employee’s opposite sex domestic partner.

Next steps?
As previously discussed, employers who already provide health benefits to same-sex spouses will have little to worry about other than possible changes to state tax withholding. Employers who wish to offer spousal coverage to opposite sex spouses, but not to same-sex spouses, should seek the advice of legal counsel.

Employers who currently offer coverage to the domestic partner of an employee may want to consider eliminating domestic partner coverage altogether now that same-sex marriages are legal in all 50 states, Puerto Rico, the U.S. Territories and District of Columbia.

Employers that want to amend their health benefits plan to extend coverage to same-sex spouses, or make changes to domestic partner coverage, should contact their Broker or Diversified Group Account Executive.  As the employee benefit landscape changes due to this landmark decision, we’ll keep you informed.

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