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IRS’ gay-marriage decision has many implications in shifting legal landscape

The IRS will recognize any couple whose union is legal in the place where it was solemnized, even if they live in one of the 37 states that don’t currently recognize LGBT marriages.

Minnesota businesses — and in particular those that employ people throughout the country — are scrambling to figure out how to comply with the Internal Revenue Service’s decision to begin recognizing all legal same-sex marriages starting Sept. 16, regardless of where a couple lives.

riskin portrait
Courtesy of Nilan Johnson Lewis
Sarah Riskin

“The [Obama] administration is sending the message that from a federal law perspective, marriage equality now exists,” said Sarah Riskin, a labor and employment attorney at Nilan Johnson Lewis. “Which is really kind of huge.”

In announcing it would recognize same-sex marriages anywhere — and retroactively — the IRS has taken the most sweeping of the myriad changes the federal government has announced since the U.S. Supreme Court’s June decision overturning most of the Defense of Marriage Act.

The IRS will recognize any couple whose union is legal in the place where it was solemnized, even if they live in one of the 37 states that don’t currently recognize LGBT marriages. And it will do so retroactively, allowing married couples to file amended tax returns for the last three years.

Mirrors common-law treatment

The decision mirrors a 55-year-old one concerning IRS treatment of common-law marriages, which are legal in some states and not in others. A couple may reside in many states over the course of a marriage, the decision found; the spouses’ legal status should thus be determined by their “state of celebration” and not their “state of domicile.” 

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The implications of the IRS ruling for Minnesota employees and employers alike are several-fold, Riskin said. And they are occurring at a time when businesses and Minnesota gays and lesbians are already busy trying to understand a suddenly different legal landscape.

“This is not something people should be trying to do themselves,” said Riskin, noting that thousands of federal rules that mention or affect marriage are being reviewed in the wake of the court decision and Minnesota’s month-old marriage equality law.

In the past, domestic-partner benefits have been treated as taxable “imputed” income for the employee, for example. Some companies, including Google and Medtronic, have compensated for this by calculating the difference and paying it to the employee — a practice known as the “gay gross-up.”

Other benefits that may be reported as taxable income include free or discount travel for spouses of airline employees or discounts on merchandise for partners of employees of retailers such as Target.

Also complicating matters: Employees whose marriages are now recognized by the IRS and who live in states that do not have same-sex marriage may still have to report imputed income at the state level.

Amended returns, beginning next week

Starting next week, employees may file amended returns seeking a refund of the taxes paid on partner benefits previously reported as income, while employers may seek a refund of Social Security or Medicare taxes paid. Whether it will be worth the time and trouble to do so is a separate question.

The most immediate issue is how to identify employees who may be affected — a process that’s fraught with possible workplace problems. LGBT employees may have come out to their benefits department but not their work group, for instance. And LGBT employees who are out may not have mentioned a marriage performed elsewhere.

“If you start asking people, it’s a sensitive topic,” said Riskin. “People may feel singled out, they may feel you are going to retaliate or they may not want to disclose.”

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Courtesy of Nilan Johnson Lewis
Jen Cornell

Better to communicate with all employees in the same manner, Riskin and colleague Jen Cornell suggested. The day before the first legal same-sex marriages took place here, the University of Minnesota sent out a system-wide email they cite as an example of a good way of communicating with employees.

The missive laid out all of the relevant scenarios — including the U of M’s decision to continue providing domestic-partner benefits to both same-sex and opposite-sex couples — and provided contact information for anyone with questions.

“I think this is why an email is beneficial,” said Riskin. “It may communicate an openness to employees who may not be out at work. It says, ‘We are really excited about this, we are really committed to being an inclusive workplace, that’s the kind of company we want to be.’”

Another puzzle for HR departments

Happy as the rule change may make Minnesota’s major employers, many of which lobbied for marriage equality in part for its recruitment and retention potential, it’s simply adding to the list of things human-resources departments must puzzle through. 

One common question is whether employers can or should continue to offer benefits outside of marriage, said Cornell. “We’ve had employers say ‘Can we stop offering domestic-partner benefits now?’ ” she said. “I’ve said you need to give people time to get married.”

In the long run, employers who continue to offer domestic-partner benefits only to gays and lesbians run the risk of violating state non-discrimination laws. Those that announce a phase-out period are probably safe, as are those that extend the benefits to everyone.

Also vexing to employers and employees alike is the hodge-podge fashion in which health-insurance plans are treating the advent of same-sex marriage here. Couples who have wed since Aug. 1, the day the law went into effect, generally can change their coverage outside of an open-enrollment period. But those who were married in the past in other jurisdictions may or may not have experienced a qualifying “life-changing event” when their unions suddenly became legal here.

The decision is up to the plan administrator — frequently but not always the insurer, not the employer. Health Partners has allowed a “special enrollment period” for couples in both situations; others are not.

Separately, last week the Department of Veterans Affairs announced it is following in the Pentagon’s footsteps and will begin extending benefits immediately to spouses of gays and lesbians legally married where the benefits were accrued.

And there are more changes to come. The Department of Labor has yet to issue guidelines for administering the Family Medical Leave Act, among other things. And retirement benefits will be the subject of a host of different decisions. 

“There are a ton of federal rules that regard marriage and each one will have to be considered,” said Riskin. “It’s going to take a while for this to all get sorted out.”