City Manager Letter

In response to Awaiting Report Item Number 11-02, regarding a report on tax treatment of health benefits for couples in same sex marriages, Personnel Director Michael P. Gardner reports the following:

The City currently provides health and or dental insurance benefits to the spouses of 22 City and School Department employees who are married to a partner of the same sex. Current federal tax law requires the City to calculate the value of this benefit as taxable income to the employee. The City does this on a quarterly basis. Health benefits for opposite sex spouses of employees are not taxable under federal law. This inequity is based solely on the same sex status of the marriage.

Some employers attempt to mitigate the extra tax burden caused by this federal tax policy by making payments to affected employees to compensate them for the extra federal tax. Some employers provide a standard flat payment. Others attempt to tailor the payments to the individual circumstances of the employee.

In order to mitigate this inequity for City employees, it is recommended that, on a quarterly basis, employees receive a stipend valued at 20% of the reported taxable income imputed to the employee, for both health and dental fund benefits. The twenty percent figure is recommended as the best estimate of the marginal tax rate for more persons who would be eligible for this benefit. The City could begin this program for non-union and management employees beginning in July 2011. For unionized employees the City could attempt to introduce the benefits as new contracts are negotiated upon expiration of existing contracts. For the City, the employees are mostly non-union.

At current rates the estimated cost to the City with full implementation is approximately $12,000 per year. For the School Department the cost with full implementation is estimated to be closer to $21,000 per year. The majority of affected School Department employees are unionized.

Should federal tax law change in the future, ending the unequal treatment of spousal benefits, it is recommended that this subsidy program end as well, so long as both same and opposite sex couples are treated equally.

Funds for the implementation of this program are included in the FY2012 budget.