Taxability of Same Sex Spouse’s Health Insurance

Taxability of Same Sex Spouse’s Health Insurance

Executive Summary

As of May 18, 2004, same sex marriage is legal in Massachusetts. (Goodridge v. Mass Department of Public Health, 440 Mass. 309 (2003).) As a result, GIC (General Insurance Commission) health insurance is now available to couples that previously did not have access to this benefit. However, federal and state laws differ as to taxability of health insurance benefits. All married couples have the same tax status under Massachusetts law. However, federal law defines “marriage” as the union between one man and one woman. Thus, the same sex spouse’s insurance is treated as taxable federal income to the state employee. Same sex married couples do not receive the same federal tax treatment of health insurance afforded to opposite sex married couples.

Considerations

The implication of this policy for same sex married couples is that employees with same sex spouses opting for health insurance will have different reportable income for Massachusetts and federal tax purposes, because the “fair market value” of the benefit to the same sex spouse is taxable income to the employee for federal tax purposes.

Policy

This document describes the Commonwealth’s policy for handling health insurance benefits for same sex spouses and explains how imputed income will be applied and reported to comply with federal income tax reporting requirements.

Commonwealth Implementation Approach: As a result of the difference in state and federal law regarding same sex marriage, the fair market value of health insurance provided to a same sex spouse will be reported in the payroll system as imputed income, subject to Federal Income and Medicare taxes. The fair market values of GIC plan offerings for FY2005 are provided below. The fair market values may be modified after each open enrollment period, just as employee contributions to their plans are changed.

GIC will notify the payroll administrator (UMass for E*MPAC and the Office of the Comptroller for HR/CMS) each time an employee opts to insure a same sex spouse and the plan to which the spouse has been added. Since this is a complex issue and has major federal tax penalties for failure to comply, CTR will handle all system updates. The CTR payroll staff will enter an earnings amount equal to half of the monthly value of the plan, and set the earnings to record the first two payrolls of the month. This income will be added to the employee's compensation and included in calculating Federal Income and Medicare taxes. The imputed income will be listed on the paycheck or EFT advice as non-cash compensation similar to the process for reporting qualified transportation taxable parking benefits (FEDHI). The taxable income reported on the employee's W-2 will reflect different taxable earnings for federal and state tax purposes. Payroll system activity will be monitored to assure that the health plan for insurance premium deduction and imputed income are consistent.

Plan	Monthly Premium	Individual (COBRA <2%)	Bi-weekly Taxable Income
Commonwealth Indemnity Plan with CIC (since CIC is completely paid by the employee, the market value of the plans with or without CIC is the same)	$1,221.54	$514.21	$257.10
Commonwealth Indemnity Plan – no CIC	$1,166.67	$514.21	$257.10
Commonwealth Indemnity Plan Plus	$872.76	$376.45	$188.22
Commonwealth Indemnity Community Choice	$840.81	$347.71	$173.85
Harvard Pilgrim Health Care POS	$910.12	$376.35	$188.17
Navigator by Tufts Health Plan	$866.80	$358.45	$179.22
Fallon Community Health Plan Direct Care	$661.80	$275.73	$137.86
Fallon Community Health Plan Select Care	$797.25	$332.11	$166.05
Health New England	$712.03	$287.62	$143.81
Neighborhood Health Plan	$801.31	$308.38	$154.19
GIC Dental/Vision Indemnity Plan	$102.15	$32.95	$16.47
GIC Dental/Vision PPO	$72.52	$23.40	$11.70

Schedule: The implementation of this change is the first payroll in October. However, employees have been allowed to enroll same sex spouses in GIC plans since mid-May. For the employees who have elected to do so, the initial pay period will include a one-time adjustment to reflect the benefit retroactive to the first month of coverage. If this one-time adjustment will be a hardship for a particular employee, contact the CTR Payroll Unit to discuss options. If the employee had family coverage in June (FY2004), the imputed income for that month will be slightly lower.

Issues Affecting Coverage Choice: Whether the family insurance benefit is a financial gain for same sex spouses is dependent on their income and the marginal tax rates given that the employee spouse’s taxable income for federal purposes is higher because of the economic benefit of the health insurance. This is a personal decision on which the Commonwealth cannot offer advice. Professional tax and/or financial advisers can be contacted to clarify the benefits and costs of choosing GIC family plan vs. other options.

Internal Controls

Payroll Directors are required to keep copies of GIC health enrollment request forms in the employee’s personnel file as an audit trail and should submit the necessary enrollment information to GIC on a timely basis. GIC will be responsible for transmitting the imputed income tax information to CTR for processing, and for notifying CTR when changes in coverage occur.

Information Sources

· Related Procedure – None

· Legal Authority

o Goodridge v. Mass. Department of Public Health, 440 Mass. 309, 798 NE2d 941 (2003).

o [Federal] Definition of "Marriage" and "Spouse," 1 U.S.C. 7

· Attachments – None

· Links

o GIC Enrollment & Benefit Questions - Contact the Group Insurance Commission at 617-727-2310, ext. 801

o Massachusetts Law on Same Sex Marriage: See http://www.lawlib.state.ma.us/gaymarriage.html

o Massachusetts Tax Issues Associated with Same-Sex Marriages, Technical Information Release 04-xx 5/27/04 Draft, Mass. Dept. of Revenue

· Contacts – CTR Help Desk

o Questions on Imputed Income processing –Comptroller’s Payroll Unit at 617-973-2458

· MMARS Knowledge Center Homepage