HR Hotline: DOMA and Tax Implications

Q: An employee has had his husband covered as a dependent under our group health plan since same-sex marriage was legalized in Connecticut. However, we have had to prepare differing W-2 statements under state and federal law. Since state law recognizes his husband as a legal dependent, the value of his dependent/husband’s insurance coverage was not deemed taxable income to him under state law, though it was under federal law. With the U.S. Supreme Court striking down the Defense of Marriage Act, can we now deduct his group health insurance premium contribution for his husband’s dependent coverage via our Section 125 Plan? If so, will we have to revise our payroll tax records for past practices?

A: Officially, the IRS is preparing updated guidance on this and other tax issues related to the June 26 court decision on DOMA. Considering that President Obama has directed all federal agencies, including the Department of the Treasury and the IRS, to revise their regulations to reflect the decision as soon as possible, it is highly likely that employee contributions toward same-sex spouses’ medical coverage will be permissible under Section 125 plans: particularly in states, like Connecticut, that recognize same-sex marriages.
As for past tax practices, hopefully the IRS will provide an opinion on retroactivity of the DOMA decision. If same-sex couples are entitled to seek refunds of past taxes paid, that would likely be achieved via filing amended personal income tax returns rather than placing the burden of such adjustments to tax liability on employers.