Adding Same-Sex Spouses & State Tax Implications

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RBH
Basic Member
Posts: 15
Basic Member
    We are extending benefit coverage to same sex spouses, starting effective 1/1/2014. The Feds have announced that same sex spouses are to receive the same favorable tax treatment for plan premiums, so we don't have to do the whole after-tax portion of the premium and the imputed income.

    However, we are in Kentucky, a state that doesn't recognize same-sex marriages, so we could be looking at a situation where we would treat the same sex spouse portion of the premium as pre-tax for federal taxes, but after-tax for state taxes. (We have employees in Indiana and Ohio, as well - states that also don't recognize same-sex spouses.)

    I've set up domestic partner benefits in a prior life...but, that was pretty straight-forward since there was no favorable tax treatment for federal taxes, much less state taxes. So...is there anyone out there that may already be working through this type of situation that could provide "tips and tricks" on how best to address this in Lawson (pre-tax federal, after-tax state, with imputed income for state)?

    (Or has anyone heard if the states of Kentucky, Indiana, and Ohio have recently decided to extend favorable tax treatment to same-sex spouses?  That would make life so much easier...!)

    Thanks.

    Ruth
    ChuckK
    Basic Member
    Posts: 4
    Basic Member
      Hi Ruth. We are looking at the same issues as we have offices in over 40 states. Have you contacted BSI? Taxation is their area but I'm not sure what if any interface changes would be needed. We're contacting BSI now but the more clients that raise the issue, the more likely we'll get an acceptable answer.
      Dave M2
      Posts: 3
        Ruth, to deal with the different federal and state taxability of benefits for same sex couples with a marriage certificate, create a new pay code and assign it to the PIK pay summary group relationship(pr20.3), set the supplemental tax code to US Exempt(pr20.2), use a calculation type of noncash income(pr20.4), and set the state tax pay code for the applicable states(e.g. Kentucky, Indiana, and Ohio) to taxable on the tax exemptions panel(pr20.5). The amount assigned to the new pay code is equal to the after tax and imputed income, which offsets the pre-tax deduction now required for federal purposes, and should be added on pr30. The pay calc simulator(pr80) will give you the same state taxable amount the employee currently has, provided you shut down any pre-tax savings plan deduction for testing purposes, which would change the basis. Let me know if you have any problems.
        BonBon
        Advanced Member
        Posts: 41
        Advanced Member

          Thank you, I think I had it part way; but I think your solution sounds better. In test (I am still testing), I did set up a new imputed pay code on the PR20.4 and tied it to the PR20.5 but used US Regular on the PR20.2, and then on the PR20.5 I added the taxable buckets that it was exempt from. Then I had to figure out what to do with the pre-tax insurance deduction since it needs to be taxed differentially for federal (pre-tax) and Wisconsin (post-tax). I did find that you can change the deduction on PR05 to have a tax status of “X” and then attach a PR05.2 (taxable wages table) to control which taxable buckets you want; but I fear this may cause problems with section 125 reports (like PR294). 

          So can I clarify what I think you are saying about the set up please? So you have an imputed pay code flagged as US exempt on the PR20.2, and then it is tied to the taxable states on the PR20.5 (which includes SUTA), and then the insurance deduction is set as a pre-tax deduction (all tax authorities are exempt), and then you add the amount of the pretax deduction to the state imputed pay code amount and the bumped up combination amount is all state authority taxed, but not federal authority taxed (which excludes FICA). Is that correct?  When you add the insurance deduction amount to the imputed pay code though, aren’t you increasing gross pay?  Does the PR290, 291, 292, 294 and 297 come out OK? And when are you putting this into effect, 09/16/2013? And are you doing a retro repair for the taxable buckets and taxes to 01/01/2013?   I appreciate all your help!

          Lee
          Posts: 37
            I have a business outside of my day job - Income Tax prep - so I asked the lead attorney at Iowa State Center for Ag Law and Taxation (Roger McEowen) for his take on this issue - with the following reply:

              A website toward the lower half of this e-mail will assist in identifying which states have adopted same sex marriage, community property, recognized civil unions, registered domestic partnerships or other legal relationships.  The “Windsor” decision only impacts the “same sex marriage” union.  Per Revenue Ruling 2013-17, for federal tax purposes, the IRS adopts a general rule recognizing a marriage of same sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of the same sex marriage.

                  You stated your payroll encompasses 24 states, so regardless of whether the state recognizes same sex marriage or not the federal treatment will be the same as long as it is a valid marriage. Pre-tax basis for federal purposes is allowed.

                  Each state tax situation will need to be analyzed to determine how benefits will be impacted at the state level.  At this time, IRS has only been able to identify which states recognize and allow “same sex” marriage and has not researched further how each individual state will be addressing the issue you have presented.

                  I was able to find a few resources for Minnesota, Rhode Island, Wisconsin, New York and New Jersey, as noted below.

             States Respond to IRS Same-Sex Marriage Guidance

            In response to the IRS (Rev. Rul. 2013-17), Minnesota, Rhode Island, and Wisconsin have issued guidance regarding the tax treatment of same-sex married couples. A control and click will link you to guidance provided.

            Map by State

            http://en.wikipedia.org/w...ited_States_by_state

            New York  http://www.mondaq.com/uni...nd+Employee+Benefits

            New Jersey
            http://lgbt-vmmlegal.com/...-same-sex-marriages/

            Dave M2
            Posts: 3
              Bonnie, it may be beneficial to go through an example.  Prior to the DOMA ruling, we had a pre-tax and post-tax deduction for medical which was manually added to pr14, along with an imputed income amount on pr30(the deductions were set up on pr14 instead of bn32 since this is a manual process, although it is possible to specify both pre and post-tax amounts on bn15, but you still need to add imputed income separately.)  To simplify the math, we'll assume a pre-tax deduction of $50 and post-tax of $25(total medical deduction of $75), with imputed income of $60.  After DOMA, we set up a pre-tax deduction of $75 on bn32, comparable to other employees enrolling in a medical plan.  The only difference for the same sex couple is we add the post-tax amount of $25 and imputed income amount of $60 and assign the $85 to the new pay code on pr30, which is only added to state tax based on pr20.5. From a federal perspective the same sex couple is processed the same as any other employee.  The new pay code is added to adjust just the state taxable portion.  The reports you mention should be ok because a same sex couple is being processed just like anyone else, except the state taxable amount is adjusted upward based on the new pay code amount.  If we assume $1,000 gross pay, prior to DOMA the federal and state taxable amount would both be $1,010(1,000 - 50 + 60).  After DOMA the federal taxable amount is $925(1,000 - 75) and the state is still $1,010(1,000 - 75 + 85).
              BonBon
              Advanced Member
              Posts: 41
              Advanced Member
                Thank you so much, the example is really helpful.  Couple things yet.
                1.)  If I set the PR20.2 to US Exempt and the PR20.5 to "T" for taxable; then I do get taxable wages for state, but no state income taxes are withheld (for WI or SUTA).  We want taxes deducted too.  So I can set the PR20.2 to US Regular and the PR20.5 to "E" (exempt federal authorites).  It works fine then.
                2.)  And I am exempting FUTA and taxing SUTA. Did you set it up that way as well?
                3.)  Are you repairing taxable and taxes for 2013 through payroll?  Or starting at the marriage date if the marriage was in 2013?
                4.)  We have health and dental.  I assume dental is also DOMA?

                Thank you!  Bonnie












                Dave M2
                Posts: 3
                  Bonnie, I apologize for the delay in responding.  You are correct regarding the taxable only for state, with no withholding being taken.  I'm not sure why the design would be to intentionally underwithhold, but that's the spec.  I've changed the attributes from US Exempt to US Regular on pr20.2 and excluded federal tax, FUT and FICA(T101-T103 & C101-C103) on pr20.5.  We have implemented the change on a prospective basis as of 10/1.  We're not aware of any guidance regarding adjustments for the withholding/taxes prior to 10/1.  You are also correct regarding DOMA for dental.  Our dental does not have a company subsidy so there is no imputed income, just the before tax/after tax split.  To get the amount for the new pay code I added together the imputed income from the medical and the after tax amounts from medical and dental.  Let me know if you want to discuss further.  Thanks.
                  Mary Porter
                  Veteran Member
                  Posts: 337
                  Veteran Member
                    How is the imputed income calculated? I've seen a couple of examples, but they involved knowing the employees tax rate and I'm wondering how that is monitored?
                    Does anyone have a spreadsheet built that can be used to help with the calculations?
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