Informed Investor: Ruling on same-sex marriage equalizes benefits for all married employees

A recent Supreme Court ruling makes same-sex marriages legal in all 50 states and the District of Columbia. This week’s column discusses how the Supreme Court decision affects various employee benefits of married same-sex couples in which at least one spouse is a federal employee, including health and life insurance, CSRS or FERS survivor annuities, and the TSP.

 

Ruling on same-sex marriage equalizes benefits for all married employees

 

On June 26, 2015, the Supreme Court ruled that same-sex marriages are legal in every state and the District of Columbia. This means that federal employees who are married to same-sex spouses can plan their retirement, support their spouses, and raise their families with all the benefits afforded employees who are married to opposite-sex spouses. Until the Supreme Court’s ruling, 37 states previously recognized same-sex marriages. The June 26 ruling means that no state can ban same-sex marriages or refuse to recognize a marriage performed legally in another state. This column discusses the effect of the Supreme Court decision on various financial issues affecting legally married same-sex couples in which at least one spouse is a federal employee.

 

Income Taxes. Married same-sex couples living in all 50 states and in the District of Columbia can now file joint federal income tax returns. Those same-sex couples who already have been living in states where same-sex marriages are legal realize that this can be a mixed blessing. This is because in some cases “married filing jointly” can result in a higher overall tax bill—the result of the so called “marriage penalty.” The more disparity in a couple’s incomes, the more likely spouses are to benefit by filing jointly. Also, those same-sex spouses who may benefit from filing jointly should look into filing amended tax returns for tax years 2012, 2013 and 2014.

 

Social Security and Medicare. With same-sex marriages legal in every state and in the District of Columbia, couples can access spousal Social Security and Medicare benefits no matter where they may be living at the time they file for benefits. That is particularly important with respect to Social Security retirement benefits. A recent analysis by investment advisory firm Financial Engines found that a same-sex couple could receive an additional $20,000 to $250,000 in lifetime Social Security disability and retirement benefits, a result of taking advantage of spousal and survivor Social Security benefits that were unavailable to them as single filers.

 

Estate Taxes. Before the Supreme Court ruling on the Defense of Marriage Act (DOMA) in 2013, same-sex spouses could not transfer property to each other without potentially owing federal gift tax, nor could they inherit assets without paying federal estate tax if the estate was large enough. With the Supreme Court ruling in 2013 and the most recent one, there is no limit on the amount spouses can gift to each other during their lifetime or inherit at the death of the other spouse without incurring gift or estate taxes. They are also entitled to the married couple’s federal estate tax exemption of $10.86 million for 2015.

 

Default Decision-Making. Before the rulings, same-sex couples who wanted to be sure that they could make health care or financial decisions on each other’s behalf would have to complete legal paperwork granting each other power of attorney. With the Supreme Court rulings, same-sex spouses are granted the same rights as opposite-sex spouses; namely, in absence of any legal paperwork, health care and financial decisions on behalf of an incapacitated spouse default to the other spouse.

 

Employee Benefits. In OPM Benefits Administration Letter (BAL) 13-203, dated July 17, 2013, OPM extended federal benefits to legally married same-sex spouses of federal employees and annuitants. These benefits apply to the Federal Employee Health Benefits (FEHB) program, the Federal Employee Group Life Insurance (FEGLI) program, the Federal Employees Dental and Vision Insurance Program (FEDVIP), the Federal Long-Term Care Insurance Program (FLTCIP), and the Federal Flexible Spending Accounts (FSAFEDS) program. FLTCIP regulations allow federal employees or annuitants who satisfy the domestic partnership standard to be treated as qualifying relatives for applying for the FLTCIP.

 

Pension and Retirement Accounts. Until the Supreme Court ruling on DOMA in 2013, same-sex couples were not eligible for spousal survivor annuity benefits from CSRS and FERS annuities. A same-sex spouse now has the same rights for a CSRS or FERS survivor annuity as an opposite-sex spouse. Same-sex spouses should note that for a same-sex spouse to keep the FEHB health insurance benefit in the event that their federal employee or annuitant predeceases the spouse, the deceased employee or annuitant must give a survivor annuity.

 

A same-sex spouse of a Thrift Savings Plan (TSP) participant also has certain rights when it comes to TSP withdrawals. In particular, when a CSRS annuitant with a TSP account wants to withdraw from it, the spouse must be first notified by the TSP. When a married FERS annuitant wants to withdraw a TSP account, the spouse must first give written consent.

 

Divorce. Before the Supreme Court decision on DOMA, separating same-sex couples could have faced significant tax issues when they divided shared property. With the change in the law, if a same-sex couple divorces, the division of financial assets such as real estate or a brokerage account is not treated as a taxable event.

 

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