Civil Unions and Tax Implications
In anticipation of the April 15 tax deadline, CNN.com had an article titled "Gay couples face higher tax bills." The content of the article came from Mount Laurel, New Jersey and it addressed how same-sex couples in a civil union in New Jersey paid higher taxes because they could not file jointly for federal purposes.
I thought it was particularly interesting that there was no mention of the tax consequences of not being able to use a cafeteria plan to pay for health insurance premiums or reimbursement of medical expenses from a flexible spending account. Clearly these would create a higher tax burden as well. But political and social implications aside, I am always concerned that employers in New Jersey properly treat same-sex couples in their benefit plans.
First, because of the impact of the Defense of Marriage Act on federal tax laws, the employer paid cost of providing coverage for same sex partners who are not “dependents” under the Internal Revenue Code would be considered regular compensation and would be taxable as income. Moreover, that portion of the premium that an employee pays that is attributable to the same-sex partners coverage would not be eligible for pre-tax treatment under a cafeteria plan. Plus, the medical expenses of the same-sex partner could not be paid with money from a Flexible Spending Account unless the partner otherwise qualified as a dependent under federal tax law. This means that employers who have employees who take advantage of the new civil union will have to make sure the value of the partner’s benefit is properly treated for federal tax purposes.
Second, because the amount of the benefits for the same-sex partner are disallowed for federal tax purposes, the employers' withholding responsibilities are calculated based on the total gross compensation that includes the value of the benefits to the same-sex partner and has to take into account that the premiums paid are not using pre-tax dollars. Plus the level of withholdings for state purposes will be different from the withholdings for tax purposes. An employee in a civil union could be "married" with two dependents for state tax withholding purposes, but "single" with no dependents for federal tax purposes. So employers can no longer assume all withholdings based on a single W-4 for same sex-couples.
I have had several employers caught up in audits that have had to pay significant tax penalties because they improperly treated same-sex couples as "married" for state and federal purposes and mistakenly made improper federal withholdings. So if you have employees who are in a civil union, now would be a very good time to review your various benefit plan structures and payroll practices to make sure both state and federal are being treated correctly.
