June 11, 2013 – Minnesota To Recognize Same Sex Marriages

June 11, 2013 – Minnesota To Recognize Same Sex Marriages

Beginning August 1, 2013, same sex couples will be allowed to marry in Minnesota.  As a result, such marriages will be recognized as “lawful,” and a same sex spouse will be treated as a spouse for virtually all purposes under Minnesota law.  This new law may impact the provision of group health benefits by employers in Minnesota.  This Alert discusses some of issues of which employers should be aware regarding same sex marriages.

Note:  Fundamental differences exist between offering coverage (i.e., making it available), who pays for the coverage (e.g., employer – employee premium cost split), and the tax consequences of the coverage (e.g., taxable to the employee or not taxable to the employee).  Other distinguishing factors include how benefits are provided (e.g., insured, self-funded, etc.) and whether the employer is a public sector employer (e.g., county, city, school district, etc.) or subject to the Employee Retirement Income Security Act of 1974 (“ERISA”).

Coverage Issues.  A basic issue raised by the recognition of same sex marriages is whether an employer must or can treat same sex spouses in the same manner as opposite sex spouses for purposes of coverage under its group health plans.  Initially, employers will need to review their plan documentation and the definition of spouse contained therein to determine whether same sex spouses satisfy the existing definition.  Definitions contained in plan documentation can vary widely from a general definition that refers only to validity under state law to a definition that addresses spouse in terms of state law and federal law, specifically the Defense of Marriage Act (“DOMA”).

Note:  DOMA provides that only the marriages of opposite sex spouses are recognized for purposes of all federal law.  In the coming months, the U.S. Supreme Court will be hearing a case in which the constitutionality of DOMA has been challenged.  If the Supreme Court determines DOMA is unconstitutional, same sex spouses may be recognized as spouses for purposes of federal law, including the Internal Revenue Code of 1986 (“Code”).

Once having identified the key language in the plan documentation, it needs to be evaluated.  Among the items to consider are the following:

• For plans that provide coverage through insurance, group health insurance policies that include dependent coverage will be required to include coverage for same sex spouses.  Minn. Stat. Section 62A.302 requires any group policy that includes dependent coverage to define “dependent” no more narrowly than the definition found in Minn. Stat. Section 62L.02.  Section 62L.02 defines “dependent” to include “spouse.”  Beginning August 1, 2013, “spouse” includes same sex spouses.  This change happens automatically.

Observation:  Offering “employee only” coverage is not an option for many employers because beginning in 2014, in order to “offer” coverage for purposes of the Play or Pay penalties under Health Care Reform, the coverage must be offered to the full-time employee and the dependent children of the full-time employee; spouses are specifically not required to be included.

• Under Minn. Stat. Section 471.61, public sector employers (e.g., counties, cities, school districts, etc.) with self-funded plans must comply with Chapter 62A (i.e., required to operate like a fully insured plan).  As noted above, Minn. Stat. Sections 62A.302 and 62L.02 will require “spouse” to include same sex spouses.  This change also happens automatically.
• Self-funded plans sponsored by employers that are subject to ERISA should be able to evaluate and determine whether to define spouse as including same sex spouses.  Self-funded plans subject to ERISA are not required to follow Chapter 62A and should be able to rely on ERISA preemption if they decide not to cover same sex spouses.
• The new law removes the provision from Minnesota law that indicates that same sex marriages from other states are void in Minnesota.  Accordingly, the rules described above should apply regardless of whether the same sex couple was married in Minnesota or in a different state that recognizes same sex marriage.
• Although the definition of “spouse” may automatically change effective August 1, 2013, there is no legal requirement to provide a special open enrollment opportunity as of August 1st to allow existing (based upon a marriage in a different state) same sex spouses to enroll mid plan year.  However, an employer may be able to voluntarily offer the opportunity to enroll same sex spouses.  For plans providing coverage through insurance, this would require the consent of the insurance carrier.  For self-funded plans (i.e., those that do not provide benefits through insurance), this would require consent of the employer’s stop loss insurance carrier, if any.  In all situations, a plan amendment is probably necessary to allow such a special enrollment opportunity.
• When group health plan coverage is lost, the rights of a covered same sex spouse to continuation coverage will depend on whether the plan is subject to Minnesota continuation laws.  Minnesota continuation laws apply when an employer provides benefits through insurance and when a public sector plan is self-funded and, therefore, required to comply with Chapter 62A (i.e., required to operate like a fully insured plan). Under Minnesota continuation law, continuation coverage is available to the insured’s spouse (or former spouse) upon certain events (e.g., termination of employment, death, divorce).  Because Minnesota law will recognize a same sex spouse as a “spouse,” a plan subject to Minnesota continuation law will be required to provide continuation coverage to covered same sex spouses.  However, group health plans subject only to federal continuation requirements under COBRA will not be required to provide continuation coverage to same sex spouses.  COBRA is a federal law and federal law, as noted above, does not currently recognize same sex marriages.  An employer in this situation might, with the consent of the insurance carrier or stop loss carrier, be able to amend its plan to provide COBRA-like rights to same sex spouses, but it is not required to do so.

Taxation Issues.  If coverage is offered to same sex spouses, the employer must consider the tax consequences of the coverage if it is taken.

• Under current federal law, a same sex spouse will not be entitled to tax-free or pre-tax health coverage under Section 105(b) unless the same sex spouse otherwise qualifies as a dependent under Section 105(b) of the Code (e.g., under the modified definition of qualifying relative).  Accordingly, if an employee enrolls a same sex spouse, and the same sex spouse is not a tax dependent of the employee, the employer will need to address the federal tax issue.  The employer must determine the value of the same sex spouse’s coverage (just as with coverage provided to domestic partners).  That value must be taxed as follows:
• If the employer pays the cost of the coverage, then the value of the same sex spouse’s coverage must be imputed as taxable income to the employee.
• If the employee pays the cost of the coverage, then the value of the same sex spouse’s coverage must be (1) deducted from the employee’s compensation on an after-tax basis (outside of the cafeteria plan), or (2) if the employee is allowed to pay for the coverage through the cafeteria plan using employer flex credits or salary reduction contributions, imputed as taxable income to the employee as the coverage is provided in accordance with the proposed cafeteria plan regulations.
• If the cost of coverage is paid in part by the employer and in part by the employee, a combination of the approaches described above must be used to ensure that the full value of the same sex spouse’s coverage is included in the employee’s taxable income. 

Caution:  Minnesota tax law imposes income tax based upon on the taxpayer’s federal taxable income (with various additions and subtractions).  If the value of the same sex spouse’s coverage is taxable under federal law (which it will be in most cases), the value of coverage will also be subject to income tax in Minnesota unless and until Minnesota law is amended to specifically subtract that amount from the taxpayer’s federal taxable income. 

• Account-based plans, such as health reimbursement arrangements (HRAs) and health flexible spending accounts (FSAs) are creatures of federal law (i.e., the Code).  As such, this type of account-based plan cannot treat same sex spouses as dependents for purposes of nontaxable reimbursements unless the same sex spouse otherwise qualifies as a dependent under Section 105(b) of the  Code (e.g., under the modified definition of qualifying relative).  If the same sex spouse is not the employee’s dependent, the only manner in which coverage may be provided to the same sex spouse under these types of plans is by providing the coverage on an after-tax basis.  This requires the employer to determine a value of the same sex spouse’s coverage (not the same as the amount of reimbursements provided for expenses incurred by the same sex spouse) and to impute that amount as additional taxable income to the employee.  Note:  This imputation of value occurs regardless of whether any reimbursements are made with respect to expenses of the same sex spouse.

To Do Items.  In light of the foregoing, plan sponsors should take the following actions with respect to their group health plans:

• Review current plan documentation to determine whether “spouse” will automatically include same sex spouses as of August 1, 2013.
• Determine whether same sex spouses (a) must be covered under the plan; or (b) can be covered under the plan at the employer’s discretion based upon the type of plan, whether it is insured or self-insured, and whether ERISA applies.
• Determine what amendments to plans are needed or desired (e.g., amendments to definition of spouse, open enrollment and special enrollment rules, continuation coverage rules, etc.).
• Determine whether the plan documentation can be amended (e.g., does amendment require consent of an insurance carrier).
• If same sex spouses will be covered, establish procedures to ensure tax consequences are properly addressed.  Watch for potential future changes in tax treatment at the State level and the Federal level.

If you have any questions or would like assistance with any of the foregoing items, please contact us.

 

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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.