October 3, 2013
CMS recently issued more eligibility guidance about same-sex marriage – and we interpret the tax and eligibility implications below.
This June, the Supreme Court in United States v. Windsor struck down the federal Defense of Marriage Act (DOMA). Interpreting the Windsor decision in late August, the IRS clarified in Revenue Ruling 2013-17 that it would recognize same-sex marriages for federal tax purposes if the marriages were validly performed in a state that recognizes such marriages – even if the same-sex couple currently resides in a state that does not recognize such marriages.
Last Friday, CMS issued two pieces of guidance that clarify the effect of the Windsor decision on eligibility determinations for the new premium assistance tax credits under the ACA and for Medicaid.* The first piece of guidance applies only to the premium tax credit program. The letter from CCIIO director Gary Cohen states that, “In light of the [IRS Revenue] Ruling, the eligibility rules with respect to premium tax credits… treat same-sex spouses in the same manner as opposite-sex spouses.” In contrast, the second piece of guidance allows state officials to apply a different approach treating same-sex couples for Medicaid and CHIP eligibility. The letter from Cindy Mann of CMSO to state health officials states that, “with respect to Medicaid and CHIP [eligibility], a state is permitted and encouraged, but not required, to recognize same-sex couples who are legally married under the laws of the jurisdiction in which the marriage was celebrated as spouses….” Dr. Mann also notes that eligibility determinations for certain traditional (or “non-MAGI”) Medicaid categories are based on methodologies used by the Social Security Administration (SSA); her letter suggests that CMS will likely issue additional guidance on “non-MAGI” Medicaid eligibility after SSA releases its forthcoming guidance interpreting the Windsor decision. Dr. Mann further notes that CMS will require states to formally clarify whether they will adopt marriage definitions for Medicaid that differ from the federal policy used by the IRS and other entities.
The federal exchange or marketplace is implementing this guidance immediately, and state-based marketplaces will do so as soon as is feasible.
These pieces of guidance have a number of interesting implications. We would note that:
Some same-sex partners with similar incomes may lose eligibility for tax credits if they marry.
For example, same-sex partners who each have an income of $40,000 may be eligible for the premium assistance tax credits under the ACA – but only if they remain single. If they marry in a state recognizing same-sex marriage, then they would not qualify for the credits because their income would be over the eligibility limit for a household of two.
Same-sex partners with different incomes face a complex set of choices
For example, two persons in a same-sex relationship who had incomes of $30,000 and $80,000, respectively, would not qualify for the tax credits if they were married in a state recognizing same-sex marriage (because their combined income is above the limit for a couple). However, the individual making $30,000 would qualify for the tax credits if he or she remains unmarried (as that individual’s income is below the eligibility limit for a household of one). Of course, the couple may end up paying a lower marginal tax rate if they marry and exercise a new right to file jointly – so part of the decision about whether and when to marry in states that recognize same-sex marriage may involve a complicated trade-off between minimizing their income tax liability and accessing insurance through the new premium tax credit program.
Some married same-sex couples in which one member has employer-sponsored insurance may lose out.
The reason is simple but not intuitive: the final rule on premium tax credit eligibility states that individuals who have access to “affordable” employer-sponsored coverage are ineligible for premium tax credits. However, “affordability” of employer-sponsored insurance is determined only with regard to the employer contribution to the employee-only coverage. Consequently, a legally-married same-sex spouse may be ineligible for tax credits if his or her spouse’s employer offers spousal coverage – even if the employer makes no contribution toward the associated premium for the spousal coverage. Because the legally-married spouse has an offer of coverage that is nominally “affordable” (as defined by the IRS in relation only to the cost of employee-only coverage), then this spouse would not qualify for the ACA’s new tax credits. In contrast, if the couple remains unmarried and spousal coverage is, therefore, unavailable, then an unmarried same-sex partner (i.e., not a legal spouse) would qualify for the tax credit if he or she were otherwise eligible.
Perhaps surprisingly, some married same-sex couples may benefit if their state does not recognize their marriage but has expanded Medicaid. For example, two persons in a same-sex relationship who each had incomes of $15,500 would not qualify for Medicaid if their current state of residence recognizes their marriage (because their combined income is above the limit for a couple). However, each member of this couple would be eligible for the expanded Medicaid program if their current state of residence did not recognize their marriage (because their individual income is below the threshold for a household of one). Note, though, that the couple in this example might qualify for a premium tax credit and associated cost sharing reductions if the marry in a state that recognizes same-sex marriage.
Of course, married same-sex couples receiving ACA tax credit will have to file jointly.
If a same sex couple were to get married in a state that allows them to do so and claim the new tax credits under the ACA, then the ACA rules require them to file a joint return for the respective tax year (as is the case with opposite-sex married couples).
Suffice it to say, marriage is incredibly complicated – and these are just the tax and ACA issues! For these reasons, we encourage you to seek tax advice from the professionals at Jackson Hewitt Tax Service. Beginning this tax season, Jackson Hewitt will provide all tax customers with free ACA assistance regardless of where they live or which program for which they may qualify.
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* The documents are available online at http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/marketplace-guidance-on-irs-2013-17.pdf and http://www.medicaid.gov/Federal-Policy-Guidance/Downloads/SHO-13-006.pdf.