Tax Implications of Gender Reassignment

[jsb]

Facts: Bob and Sue get married. 10 years later, Bob undergoes a gender reassignment process and becomes Mary. Sue comes to work for you and wants to add her spouse, Mary, to your medical plan. Counsel advises that Mary is still the spouse under terms of your plan as the marriage still appears valid under applicable state law, as there is nothing in the trans-gender process that would otherwise invalidate the marriage.

Issue: The Defense of Marriage Act defines "spouse" as a member of the opposite sex.

Question: What are the federal tax implications of the gender reassignment for your 125 plan? Is there imputed income for the employer paid premium? Must employee contributions for dependent coverage be post tax?

Is your analysis different if both spouses work and Sue is the primary income earner, if Mary is the primary income source, or if Mary does not work?

(Your plan permits same sex domestic partners and the tax consequences of this arrangement are known. Your plan permits a continuously disabled adult child dependent to be enrolled, but no other adult who is not a spouse or DP.)

Looking forward to your insights on this situation.

[Guest chloe]

Believe it or not, we actually had this same situation last year and we did some research into it. When a person undergoes gender reassignment, that doesn't change their sex for legal purposes. Their birth certificate, etc. will stay they are male. The person in our case was actually trying to sue to have his/her gender changed legally, but has been unsuccessful so far. As long as the state still recognizes them as legally married, there are no state or federal tax issues because state and federal law recognize the person as a male. They are legally married spouses and are not domestic partners (for legal purposes anyway). If they get divorced or the state nullifies the marriage, then that would be a different issue because they won't qualify as a spouse any longer and may qualify as a domestic partner at that point.

[Lame Duck]

Would your answer be any different in a state where they allow an individual undergoing gender reassignment surgery to change his or her birth certificate to reflect the new gender? (California is one of these.) My personal feeling is that a marriage validly entered into remains valid regardless of subsequent changes.

[Guest chloe]

I don't think the answer would change as long as the state still acknowledged the marriage as legal. We're really concerned with federal law here, and federal law doesn't recognize the change or domestic partner relationships. If there is ever a state that allows same sex couples to marry, that may have an affect for state tax purposes. But unless the federal government starts recognizing same sex marriage, the federal tax implications are unaffected.