Same-Sex Spouse Health Coverage — Recent Developments in State Tax

Employers operating in Nebraska, North Carolina, Ohio and Wisconsin may have withholding obligations when offering health coverage to same-sex spouses of employees in those states. As a result of the Supreme Court's decision in United States v. Windsor, the federal definition of marriage under the Defense of Marriage Act (DOMA) was held unconstitutional. The federal definition of marriage now includes marriages between partners of the same sex. As we described in an August 2013 update, the decision means that employer-provided health benefits to a same-sex spouse of an employee are tax free to the employee for federal tax purposes. However, whether such benefits are taxable for state tax purposes depends on state tax laws and other guidance.

For most states, the starting point for determining state income tax liability is the federal definition of income. After the Windsor decision, this creates a tension in those states that follow the federal income definition, but do not recognize same-sex marriage. Several states have issued guidance addressed to individual taxpayers, informing them that while the state uses the federal income definition as the starting point for state income tax liability, same-sex spouses will not be treated as spouses at the state level. The guidance provides that the state will not allow same-sex spouses to file joint state tax returns, and that health benefits provided to the same-sex spouse of an employee will be considered income for purposes of state income tax. However, this guidance does not address the responsibility of employers for imputing income on health benefits provided to same-sex spouses.

Four states — Nebraska, North Carolina, Ohio and Wisconsin — have issued agency guidance that suggests employers impute income on health benefits provided to same-sex spouses. The income would be imputed for purposes of state income tax, but not for purposes of federal income tax. Legislatures in these states have yet to act on the issue, so the effect of the agency guidance is unclear. In light of the guidance, however, employers with employees who work in these states should consider whether to impute income for state tax purposes on health benefits provided to same-sex spouses.