Health & wellness

US tax penalty for gay couples is disappearing

Spouses’ benefits faced federal taxes

Many Massachusetts employers extend health insurance benefits to their workers’ same-sex spouses. But even in a state where gay marriage has been legal since 2004, coverage has come at a cost for these couples. They must pay federal taxes, often more than $100 a month, not owed by other married people.

Now those tax penalties are disappearing, among the first tangible changes gay couples in Massachusetts have seen since the Supreme Court in June tossed out a federal law defining marriage as between one man and one woman.

Some employers have stopped withholding federal taxes from paychecks for their insurance contributions for same-sex spouses, though the Internal Revenue Service has not yet issued a specific directive that gay couples are eligible for the same tax benefits as other families.

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Some major insurers in Massachusetts allow same-sex spouses to sign up for health coverage immediately, without waiting for the enrollment period, if the tax penalties required by the invalidated Defense of Marriage Act kept them from buying insurance previously.

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For some Massachusetts families, the tax penalties have been a regular reminder of inequality under the law.

“It was like a smack of, you’re not the same, you’re not equal, you’re second class, every time the paycheck came,” said Dorene Bowe-Shulman.

Bowe-Shulman was a student and a two-time cancer survivor when she and her wife, Mary, married at their first opportunity in 2004. Even with the tax penalties, joining her wife’s family plan, which already covered their two daughters, was her best option.

Yet every month in recent years the coverage cost them nearly $140 in taxes that they would not have paid as an opposite-sex couple, “money that we could be saving for our kids for college and just for regular living expenses, like everybody else,” she said.

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The couple had joined a federal lawsuit filed by Gay & Lesbian Advocates & Defenders, challenging the Defense of Marriage Act on grounds similar to those made by Edith Windsor, whose case was heard by the Supreme Court this year. The day the decision was expected, Bowe-Shulman watched for the news at home with her girls, then reacted with tears.

In the very next paycheck, the couple noticed the tax penalties were gone.

“We’re just being treated like any other family,” Bowe-Shulman said. “It wasn’t just about the money but that feeling.”

Employer-based health insurance typically is exempt from income taxes. But under the Defense of Marriage Act, the government would not recognize gay couples as eligible for federal tax benefits. That meant workers paid taxes on the employer-paid portion of the premium that covered their same-sex spouses. Unlike other married couples, they could not use pretax income for the portion of their own premium payment attributed to their spouse.

Blue Cross Blue Shield of Massachusetts, the state’s largest health insurer, is holding a special enrollment period through Sept. 26 for employers to allow their workers to add spouses to their plan if the tax penalties previously had deterred them. The insurer, which had joined hundreds of employers in signing a legal brief urging the Supreme Court to strike down the marriage law, has received about 15 requests from employers and brokers, a spokeswoman said.

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Janson Wu, a staff attorney at Gay & Lesbian Advocates & Defenders, lauded the decision. Gay couples have been waiting a long time for equal benefits, he said, “and they shouldn’t be forced to wait any longer because of a technicality.”

‘We’re just being treated like any other family.’ — Dorene Bowe-Shulman, Plaintiff who was hit by federal tax on insurance benefits.

Tufts Health Plan said it also would offer a special enrollment period for employers. A spokeswoman for Harvard Pilgrim Health Care said the insurer planned to hold open enrollment for two customers in municipal government who had requested it.

Despite the IRS’s silence on the court decision, employers can immediately stop treating the portion of premiums they pay as taxable income and will no longer owe payroll taxes for that money, said Amy Sheridan, a lawyer specializing in benefits at Sullivan & Worcester.

It is not clear yet whether the IRS will allow same-sex couples to begin using pretax dollars to pay their premiums now, as a result of the decision, or at the next regular enrollment. Those who take advantage of special enrollment may have to wait for a change in how they pay for coverage.

On that point, Sheridan said, she has advised clients that “there’s no reason to rush into this.” The IRS is expected to issue guidance soon. The agency could allow both couples and employers to request refunds for taxes paid on benefits over years that the Defense of Marriage Act was in place.

Most Massachusetts employers offering health benefits cannot discriminate against same-sex spouses. That’s not the case for self-insured businesses, typically large employers, whose insurance practices are subject to federal regulation, not state law.

Chelsea Conaboy can be reached atcconaboy@boston.com. Follow her on Twitter@cconaboy.