Pennsylvania ends same-gender marriage ban – are you taxing benefits correctly?

On May 20, 2014, a US District Court judge overturned Pennsylvania’s 1996 ban on same-gender marriage ruling it unconstitutional. (Deb Whitewood, et al, vs. Michael Wolf, 1:13-cv-1861) Governor Tom Corbett chose not appeal the ruling making it the 18th state plus the District of Columbia that now allows the issuance of marriage licenses to same-gender couples. Pennsylvania has never recognized civil unions or registered domestic partnerships, and until now, was the only state in the northeast region that prohibited same-gender marriage.

The May 20th ruling ends a wave of legal challenges that began in September 2013. Guidance has not yet been issued by the Pennsylvania Department of Revenue; however, it is assumed that fringe benefits provided to a same-gender spouse will receive the same state and local tax treatment that was extended to a lawful spouse under prior law.

State and local taxation of same-gender partner benefits isn’t as easy as it seems. That’s because a state’s civil laws governing marriage do not necessarily govern the income tax and unemployment insurance coverage rules. Take Missouri for instance. The state prohibits marriage between a couple of the same gender; however, a same-gender couple lawfully married in another state is treated as married for Missouri income and unemployment insurance tax purposes.

Speak to a trusted employment tax advisor about the payroll tax treatment of same-gender partner benefits.

California gives new tax break on same-sex partner benefits

california_mapErnst & Young LLP issued a tax alert explaining that recently enacted legislation will temporarily exclude from California personal income tax (PIT) the amount of federal income tax that employers pay for health insurance benefits provided to employees who are a member of a registered domestic partnership.

The law is effective immediately and applies for taxable years beginning on or after January 1, 2013 and through December 31, 2018.  (AB 362, signed by the governor on October 1, 2013.)

 Under all other circumstances, federal income tax paid by employers on behalf of their employees generally is included in wages subject to California PIT.

For the definition of a registered domestic partner see: https://www.ftb.ca.gov/individuals/faq/dompart.shtml

Prior law

Since January 1, 2002, employer-provided accident and health insurance provided to the domestic partner of an employee (and that partner’s dependents), along with several other benefits, has been excluded from California gross income (Revenue and Taxation Code section 17021.7) 

Prior to the passage of AB 362, an amount reimbursed by an employer to the employee for the federal income tax incurred on these benefits was not excluded from California PIT.

Employer payment of federal income tax under the new law

Assembly Bill 362, the Same Sex Couple Tax Fairness Act, excludes from California gross income any amounts received by an employee from an employer to compensate for additional federal income taxes that are incurred by the employee on employer-provided health-care benefits because, for federal income tax purposes, the domestic partner of the employee is not considered the spouse of the employee.

The exclusion from gross income also applies to any amount of the employer-provided health-care compensation paid to an employee that represents the “grossed-up” amount that an employer includes to offset additional federal income taxes incurred on such compensation.

According to new Revenue and Taxation Code Section 17141:

“Gross income shall not include any amount received by an employee from an employer to compensate for the additional federal income tax liability incurred by the employee because, for federal income tax purposes, the same-sex spouse or domestic partner of the employee is not considered the spouse of the employee under Section 105(a) or Section 106(a) of the Internal Revenue Code, including any compensation for the additional federal income tax liability incurred with respect to those amounts.”

The Act was introduced to the California state legislature on February 14, 2013, months before the US Supreme Court Windsor decision that overturned section 3 of the Defense of Marriage Act (DOMA) and allowed same sex married couples the same tax break on a federal level as opposite sex married couples. It was intended to cover both same sex married couples and those involved in a domestic partnership. As a result, the Act has a lesser impact than originally intended by the bill’s author.

Impact of the new law on California same-sex partner benefits

According to Forbes, (http://www.forbes.com/sites/hbsworkingknowledge/2013/06/26/how-overturning-doma-will-benefit-businesses), as of the date of the Supreme Court decision, 38 US companies used the gross up calculation to cushion employees from the unequal federal income tax rules applicable to for employer provided same-sex partner benefits. The California senate summary for AB 362 states that 71 California companies use the gross up method for this purpose.

It’s been estimated that employees working for companies that provided same sex benefits, but did not gross up, incurred an average of $1,069 extra taxes per year—possibly more if the partner’s dependents were also included in coverage.

 Correcting 2013 wages and PIT for active employees

For active employees, employers should immediately adjust 2013 California PIT taxable wages using one of the methods below:

(1)   Refund or credit the overpaid PIT for the previous nine months to affected employees prior to December 31, 2013 and file adjusted quarterly tax returns with the Employment Development Department (EDD)

(2)   Don’t refund or credit overpaid PIT for the previous nine months, but inform employees that the law change may result in a California PIT refund on their personal income tax returns.

 Regardless of the approach an employer takes, the 2013 Form W-2, box 16 must reflect the correct amount of California taxable wages.

According to an EDD representative, employers must first credit or refund the overwithheld amount to the employee during the current 2013 calendar year. Then, the employer should file Form DE 9ADJ, Quarterly Contribution and Wage Adjustment for each affected quarter to claim a credit or refund of the overpaid amount.

The EDD also recommends that employers require employees to sign a statement indicating that the overwithheld PIT has been credited or refunded. The employer must complete box 2 of the Form DE 9ADJ indicating that the overpaid amount has been refunded to the employee and that the amount to be credited will not be reflected on the Form W-2.

Form DE 9ADJ can be found at http://www.edd.ca.gov/pdf_pub_ctr/de9adj.pdf.

Correcting 2013 wages and PIT for terminated employees  

According to the Form DE 9ADJ instructions, an employer may claim a credit or refund of PIT overwithheld from an employee’s wages when the excess amount is credited or refunded to the employee during the same calendar year and the excess amount is not shown on the Form W-2 issued to the employee.

An employer that has already issued the 2013 Form W-2 to employees should not refund the PIT overwithholding nor change the PIT withholding amount on the Form W-2.

The employee will receive a credit when the California Resident Income Tax Return (Form 540) is filed with the California Franchise Tax Board.

Employers must adjust the California state wages for calendar year 2013 on Form W-2 (box 16).

Ernst & Young LLP insights

Employers should be aware that the law applies only to California gross income, and does not affect the rules applicable to taxes imposed under other laws, or in other jurisdictions.

Employers that gross up domestic partner benefits and reimburse employees for the additional federal income tax incurred due to coverage of a domestic partner must still include these amounts as federal taxable wages on Form W-2.

Federal legislation has been introduced for consideration that would extend the definition of marriage to include individuals and their dependents who are a member of a registered domestic partnership, civil union, or similar arrangement recognized under state law.  (SB 729/HR 2499, the Tax Parity for Health Plan Beneficiaries Act of 2013)

Same-sex partner benefits | Do you have a plan?

The Supreme Court’s ruling, in United States v. Windsor, that Section 3 of the Defense of Marriage of Act (DOMA) is unconstitutional has triggered guidance from Treasury, Internal Revenue Service,  US Department of Labor and state taxing authorities changing the manner in which employers retroactively and prospectively administer, tax and report same-sex spousal benefits.

Integrating the new rules into multiple business practices means analyzing, implementing and communicating with employees in a short time frame.

To start you off in the process, Ernst & Young LLP has  prepared a handy check list and sample work plan.

You can download the check list and sample work plan at  http://response.ey.com/CSG3/?doma

New Jersey judge strikes down same-sex marriage ban

The New Jersey courts have ruled that the state’s same-sex ban marriage is unconstitutional. The governor is expected to challenge the decision; however, the ruling marks the first time that a state has banned same-sex marriage on the basis of the  US Supreme Court decision in Windsor.

What we see playing out in New Jersey underscores the shift employers can expect to see in state and loca laws, particularly in those states that recognize civil unions and domestic partnerships rather than same-sex marriage.

Here’s the link to New York Times article.  http://www.nytimes.com/2013/09/28/nyregion/new-jersey-judge-rules-state-must-allow-gay-marriage.html?emc=edit_na_20130927&_r=0