Supreme Court Expands Access to Tax, Retirement, and Other Benefits for Same-Sex Couples

Same-sex couples celebrate, but many questions remain in the wake of the Supreme Court ruling.

The Supreme Court decision to strike down the Defense of Marriage Act (DOMA) — ruling key aspects of the law as unconstitutional — immediately opens the door to a raft of federal benefits that previously have been denied same-sex couples. In addition, by declining to rule on California’s Proposition 8, which bans same-sex marriage, the Court effectively cleared the way for California to join the other 12 states and the District of Columbia in recognizing same-sex marriage.

The historic decision will immediately extend many federal benefits to couples in those states where same-sex marriage is legal, and will strengthen the president’s ability to broaden other benefits through executive orders.1

Many questions remain unanswered, however. For instance, the ruling did not address how the government should treat civil unions between same-sex couples. Nor does the decision compel states that currently do not recognize same-sex marriage to do so. This could create issues (and diminished rights) for couples who are married in a state that permits same-sex marriage but move to one that does not.

While it will take time for the government’s various constituents (e.g., the Department of Labor, the Internal Revenue Service, Social Security, and Medicare) to issue concrete guidance on benefits and how they will be implemented, some areas that are sure to be affected include the following:

Big Picture Benefits

Income taxes: Same-sex married couples will now have the option of filing their federal tax returns jointly, which may mean lower tax bills. Married couples filing jointly can take better advantage of certain credits and deductions for children, mortgage payments, and other items that can generate significant tax savings. They can also share capital gains and losses, receive a larger exclusion if they sell a home (up to $500,000 for married couples, compared with $250,000 for an individual), among other tax breaks. In addition, couples who were forced to file separate federal tax forms in the past may be eligible to claim refunds on any amounts they overpaid by filing amended returns as a married couple.2 (Generally, the IRS allows up to three years for amended returns to be filed.)

Estate taxes/planning: Transferring wealth will now become greatly simplified for same-sex couples. Like traditional couples, same-sex couples will be able to pass assets directly to their spouses after death. Where trusts have been created, same-sex couples will want to review and/or update their arrangements with an estate planning attorney to ensure the surviving spouse has tax-free access to trust assets (income and principal) — a benefit that previously has only been available to traditional couples.

Health and retirement benefits: While more employers have been allowing same-sex partners to be added to an employee’s health plan in recent years, in many cases that has been treated as a taxable benefit. Now that taxes should no longer be an issue, couples may want to review their health insurance choices, evaluating the quality and affordability of each other’s options.

In addition, under the ruling, employees will have expanded access to the following employer-sponsored health and retirement benefits. Depending on plan design, this may include:3

  • Health savings and flexible spending accounts.
  • COBRA continuation coverage.
  • HIPAA special enrollment rights.
  • Ability to pay for health benefits with pre-tax dollars and receive an employer contribution toward a same-sex spouse’s coverage without being taxed on such coverage (also referred to as taxation on “imputed” income).
  • Mandatory 401(k) beneficiary status absent spousal consent.
  • The right to be covered by a joint and survivor annuity in defined benefit plans.

These are some of the very preliminary implications of the historic high court ruling. More details will be provided as the framework for the law takes shape.

Source/Disclaimer:

1Source: The New York Times, “Supreme Court Bolsters Gay Marriage With Two Major Rulings,” June 26, 2013.

2Source: MarketWatch.com, “Same-sex couples: Celebrate, then call a CPA,” June 26, 2013.

3Source: Aon Hewitt news release, June 26, 2013.

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