The Defense of Marriage Act (DOMA) defines marriage at the federal level as a legal union between one man and one woman and excuses states from any obligation to recognize same-sex marriages recognized in any other state. As a result, many states have enacted so-called “mini-DOMA” laws providing that those states will not recognize for any purpose same-sex marriages recognized in other states.
As has been widely reported, DOMA’s constitutionality is currently under consideration by the U.S. Supreme Court in United States v. Windsor and a decision is expected in June. If DOMA is struck down, employers and other benefit plan sponsors should consider the potential effects not only on the definition of “spouse” for benefits purposes, but also the definition of “child.”
Currently, if employer-sponsored health coverage is made available to a child of an employee’s same-sex spouse or partner (who is not the child of the employee), it may result in imputed income to the employee for federal tax purposes based on the value of that coverage if the child does not meet certain requirements under the Internal Revenue Code (Code). But, depending on whether DOMA is repealed (and the effect of that repeal on state mini-DOMA laws), a child’s status may change for this purpose.
Code Section 152(f)(1) defines “child” as including “stepson” and “stepdaughter.” This definition is used for various federal income tax purposes, including certain fringe benefit rules, certain retiree health benefit rules and the new shared responsibility rules relating to the age 26 mandate of the Affordable Care Act. But what is a stepchild? Although the term has varying definitions (or no definition at all) for various state and federal laws, a stepchild may generally be viewed as any child of an individual’s spouse who is not also that individual’s adopted or natural child.
The IRS has issued FAQs stating that an individual is the stepparent of the child of his or her same-sex spouse for federal income tax purposes if he or she is the stepparent under the laws of the state in which the couple resides. Therefore, because a child of a same-sex spouse is already considered to be an employee’s stepchild for federal income tax purposes if the couple resides in a state that recognizes the employee as the stepparent, the employee can avoid having imputed income for federal tax purposes on the value of employer-sponsored health coverage provided to the child. If DOMA is struck down (and depending on the impact of the decision on state mini-DOMA laws), additional children of same-sex spouses may attain similar favorable tax status. This status may even extend to situations where a couple resides in a state that does not recognize the child as a stepchild or permit same-sex marriage depending on the specific definition of “child” in the benefit plan.
Employers and health plan administrators should start reviewing their employee benefit plans to understand the potential impact of a decision striking down DOMA (and the effect of that repeal on state mini-DOMA laws) on their plans’ definitions of “children” and “stepchildren” and the changes this may impose on plan coverage and administration.