Employers boost tax benefits for same-sex couples

March 26, 2012: 11:24 AM ET

Ernst & Young is one of about 35 businesses that offer tax benefits to same-sex couples, nearly triple the 12 companies that offered it just a year ago.

By Katherine Reynolds Lewis, contributor

FORTUNE -- This is the last tax season that Bryan Parsons, an associate director at Ernst & Young, will have to pay extra income taxes for the health benefits his employer provides to his domestic partner Carlo Iyog.

That's because starting Jan. 1, Ernst & Young became one of a growing number of companies who will compensate lesbian, gay, bisexual and transgender employees for a provision in federal tax law that forces them to pay income taxes on health and wellness benefits for same-sex partners, a sum that heterosexual married couples don't have to pay.

"I'm looking forward to this time next year, when I can go back and do the calculation and see how much money I've saved," says Parsons, expecting that it will amount to a couple thousand dollars.

"There's a huge sense of pride that the firm has taken an opportunity to put its money where its mouth is," he says. "I don't know that there's any monetary figure that could match that."

Ernst & Young is one of about 35 businesses that offer the benefit now -- often called a gross-up benefit -- nearly triple the 12 companies that offered it just a year ago, according to the Human Rights Campaign, the largest LGBT civil rights organization. Other companies that began offering the benefit on Jan. 1 of this year include American Express (AXP), Bank of America (BAC), Microsoft (MSFT), Morgan Stanley (MS), and Yahoo (YHOO), according to interviews with spokespeople.

The problem the benefit aims to address occurs even in the eight states that legally recognize gay marriage. That's because federal tax law treats those couples as unmarried due to a provision in the Defense of Marriage Act.

"If you're a gay couple in Massachusetts you're not going to incur the state taxes," explains Deena Fidas, deputy director of corporate programs for the Human Rights Campaign. "Because of the way DOMA defines spouses, if I have a husband who's on my health care plan, I don't pay federal taxes on his share of benefits, but if I have a domestic partner, I do."

For instance, an employee in the 20% tax bracket whose partner's health coverage is valued at $200 each pay period will pay $40 of income tax. The employer would pay that individual $48 to compensate for the inequity: $40 to reimburse for the tax, and another $8 to reimburse the tax paid on the gross-up payment itself. The value of a domestic partner health and wellness benefit is calculated at the end of the year and added to your W2, so companies typically cannot determine the cost of the gross-up tax benefit until the end of the year in which it begins.

Ernst & Young has offered same-sex domestic partner benefits since 2002. The issue of tax inequity was raised at a November town hall by a member of the firm's LGBT affinity group and quickly addressed. "We were able to implement it rather quickly," says Karyn Twaronite, Americas inclusiveness officer at Ernst & Young. "At the end of the day, it was just a matter of fairness."

HRC estimates that, on average, the benefit provides an extra $1,200 to an employee's family. Shortly after Ernst & Young announced the new benefit, KPMG and PricewaterhouseCoopers followed suit.

"In our observation, the changes tend to move like wildfire, because these are extremely competitive industries that watch each other very closely," notes Fidas, citing law, financial services, Internet, accounting and consulting firms as especially interested in keeping pace with each other's benefits packages to recruit and retain top talent.

Bank of America began offering domestic partner health benefits in 1998 and added the tax benefit this year for partners and any eligible children. Morgan Stanley has offered domestic partner health benefits since 2001 and added the equalization payment this year.

At American Express, the new benefit grew from the partnership between the benefits team and the PRIDE network for LGBT employees, according to spokeswoman Iris Hernandez. Effective this year, the firm also waived the same-gender domestic partner affidavit requirement and added coverage for gender reassignment surgery up to a maximum of $100,000.

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About This Author
Katherine Reynolds Lewis
Katherine Reynolds Lewis
Contributor, Fortune

Katherine Reynolds Lewis is an award-winning Washington D.C.-based journalist specializing in finance, work, and family issues. She has written for publications including the Fiscal Times, Money, MSN, the New York Times, Parade, Slate, USA Today magazines, and the Washington Post Magazine. Previously, she worked as a national correspondent for Newhouse News Service and reported for Bloomberg News in Washington. She began her career in New York at the Bond Buyer, after graduating from Harvard College with an A.B. in physics. She is active in the Asian American Journalists Association and serves as founding co-chair of the AAJA Digital Group.

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