On June 26, 2013, the United States Supreme Court issued its landmark decision in U.S.v. Windsor, holding that section 3 of the Defense of Marriage Act ("DOMA") is unconstitutional under the Due Process Clause of the Fifth Amendment .1Windsor has significant implications for retirement and health and welfare plans subject to federal law, including the Internal Revenue Code ("Code") and the Employee Retirement Income Security Act of 1974 ("ERISA").
The marital identity confusion created by section 3 of DOMA forced plan sponsors to implement administrative procedures to ensure that only federally recognized spouses (that is, opposite-sex spouses, aka "DOMA spouses") were afforded certain rights or benefits mandated under federal law. Many plan sponsors also either voluntarily, or at the insistence of the Internal Revenue Service ("IRS"), amended their benefit plans to provide a DOMA definition of "spouse" that differed from the definition the plan used for benefits not directly regulated by federal law. Employers modified their payroll systems to separately track federally recognized marriages for federal tax purposes and state-recognized marriages for state tax purposes.
With the Supreme Court’s invalidation of section 3 of DOMA and increasing state recognition of marriages between persons of the same sex (today, 13 states and the District of Columbia recognize marriages between same-sex couples, and nearly 200,000 same-sex couples have entered into marriages in the United States )2, plan sponsors must again review and update plan documents and procedures to conform to federal recognition of state-sanctioned marriages between same-sex couples. Optimally, from the standpoint of uniform plan administration across all states, that would mean being able to eliminate all distinctions between same-sex and opposite-sex married couples. The politics of same-sex marriage being what they are, however, employers with participants residing in states that do not recognize same-sex marriages should be preparing for the prospect that in those states, at least, DOMA-like distinctions may remain.
Part I of this article discusses the initial impact of Windsor on retirement and health and welfare plans. Part II addresses two significant questions on the reach of Windsor requiring clarification from the federal government, namely:
- Whether a state-sanctioned marriage between a same-sex couple residing in a state that does not recognize that relationship will be recognized under federal law; and
- Whether the Windsor ruling applies retroactively.
Part III briefly addresses immediate action steps that should be taken by plan sponsors.
Initial Impact of Windsor
The invalidation of section 3 of DOMA under Windsor has the immediate effect of granting same-sex couples who are married under state law the same federal rights, protections, and responsibilities as are afforded to married opposite-sex couples under ERISA and the Code. Until there is guidance on the retroactive application of Windsor (as described below), these rights should be provided effective July 21, 2013 (25 days after the date of the decision), and at the least, should apply to same-sex couples that reside in a state that recognizes marriage between same-sex couples at the time that the marital status determination is required (e.g. benefit election, distribution, etc.).
Windsor did not address federal recognition of domestic partnerships, civil unions, reciprocal beneficiaries, or other "marriage equivalent" relationships. As a result, plan-related policies and procedures regarding domestic partnerships, civil unions, reciprocal beneficiaries, or other "marriage equivalent" relationships can be applied in the same manner as they were before Windsor.
Below we address the steps plan administrators of both qualified plans and health and welfare plans should take to comply with Windsor.
Windsor’s Impact on Qualified Plans
Plan sponsors should carefully review qualified plan documents and administrative policies to determine whether plan amendments or administrative changes are necessary to conform to Windsor. Pending guidance from the IRS, plans should be administered in accordance with what we know Windsor holds — that a participant with a same-sex spouse, who resides in a state that recognizes marriages between same-sex spouses, must be treated as married. What follows is a discussion of how key qualified plan rules should be administered for participants who reside in a state that recognizes a marriage between two persons of the same sex.
Qualified Joint and Survivor Annuities and Spousal Consent to Benefit Elections
ERISA and the Code require all defined benefit pension plans and any defined contribution plans subject to the funding rules of Code section 412 (e.g., money purchase pension plans) to pay a married participant’s retirement benefit in the form of a qualified joint and survivor annuity ("QJSA") or qualified optional survivor annuity ("QOSA"), unless the participant elects another payment form and the participant’s spouse (or a participant’s former spouse who is treated as a spouse under a QDRO) consents to that election. The QJSA is an annuity that provides benefits for the life of the participant and a 50% (or more) survivor benefit for the surviving spouse’s life. The QOSA generally provides a 75% survivor benefit to the spouse. The plan must pay an unmarried participant’s retirement benefit in the form of a single life annuity, unless the participant elects some other payment form. Before Windsor, a participant with a same-sex spouse was considered unmarried under federal law; thus the participant’s default form of retirement benefit was a single life annuity, and the same-sex spouse’s consent could not be required for the participant to receive that or any other benefit form. With the Supreme Court’s decision in Windsor, the participant’s marriage now is recognized under federal law, and as a result, the participant’s default form of benefit must be a QJSA (and a QOSA must be offered), and the participant must obtain spousal consent to elect an alternate form of benefit.
Defined contribution plans not subject to Code section 412 (e.g., 401(k) plans) generally are not subject to these QJSA rules if the plan does not offer an annuity form and if it provides that 100% of the participant’s vested account balance is paid to the participant’s spouse upon the participant’s death, unless the participant’s spouse consents to another beneficiary. Post-Windsor, in order for a 401(k) plan to remain exempt from the QJSA rules, the death benefit must be paid to the participant’s same-sex spouse unless the same-sex spouse consents to a different beneficiary.
Spousal Consent to Participant Loans
Certain defined contribution plans subject to the funding rules of Code section 412 (e.g., money purchase pension plans) require spousal consent for plan loans. Defined contribution plans that permit participant loans must now obtain spousal consent to any loans taken by a participant married to a same-sex spouse. Before Windsor, this was permissible, but not required.
Death Benefits, Survivor Annuities and Spousal Consent to Beneficiary Designations
Defined benefit plans and defined contributions plans subject to the QJSA rules must provide the surviving spouse (or surviving former spouse treated as a spouse under a QDRO) of a married participant with a qualified pre-retirement survivor annuity ("QPSA") unless the spouse has waived his or her right to a QPSA. The annuity is equal to the survivor portion of the plan’s QJSA (at least 50% of what the participant would have received). Plans are not required to provide a QPSA to a non-spouse beneficiary, and many plans do not. Post-Windsor, the QPSA must be paid to the surviving same-sex spouse unless the same-sex spouse waives his or her right to the QPSA.
As described above, defined contribution plans not subject to the QJSA rules (e.g., 401(k) plans) are not subject to any QPSA rules.
Virtually all plans have default beneficiary rules that identify a person or class as a participant’s beneficiary in the absence of a valid beneficiary designation (e.g., spouse or, if there is no spouse, children or, if there are no children, parents and so on) or in the event a participant’s designated beneficiary predeceases the participant.
A plan’s default beneficiary hierarchy is purely a plan design matter and hence for the most part, never has been subject to federal restriction or mandate. Thus, for example, before Windsor, a plan could define the term, "spouse" for purposes of its default beneficiary provisions to include a same-sex spouse recognized as legally married under the laws of any state or foreign jurisdiction. Although nothing in Windsor would limit a plan’s flexibility in this area, plan sponsors should nonetheless carefully review plan provisions governing default beneficiaries to determine if they accurately reflect the plan sponsor’s intent and amend such provisions where necessary to eliminate any ambiguities.
Defined contribution plans generally may permit a participant to take a hardship distribution to pay medical expenses, tuition, or funeral expenses of the participant, the participant’s spouse or primary beneficiary, and/or certain other parties. Before Windsor, a participant’s same-sex spouse was not treated as a spouse for this purpose, but the participant could request a hardship for expenses incurred by his or her same-sex spouse if the participant properly named the spouse as the primary beneficiary. Post-Windsor, a participant’s same-sex spouse must be treated as a spouse for purposes of the hardship rules. It is no longer necessary for a participant to designate his or her same-sex spouse as primary beneficiary to take a hardship distribution to pay for the spouse’s medical expenses, tuition or funeral expenses. As a result, a participant could name his or her children as primary beneficiaries but still request a hardship for expenses incurred by the participant’s spouse.
Qualified Domestic Relations Orders
Before Windsor, it was not entirely clear whether a qualified plan could recognize a court order entered in a proceeding to dissolve a same-sex marriage as a qualified domestic relations order ("QDRO"). To be a QDRO, an order first must be a "domestic relations order", which is defined under ERISA and the Code as one relating to the provision of "child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant." Before Windsor, a same-sex spouse could not qualify as a spouse or former spouse, but might qualify as an "other dependent" of the participant. Post-Windsor, a participant’s same-sex spouse must be recognized as a spouse or former spouse for purposes of this definition, and a plan must recognize a court order dividing benefits earned during a participant’s same-sex marriage as a QDRO, assuming the order satisfies all the other applicable QDRO requirements.
Eligible Rollover Distributions
A non-spouse beneficiary may roll over an eligible rollover distribution only to a special type of individual retirement account ("IRA") known as an inherited IRA. Funds in an inherited IRA generally must be distributed to the non-spouse beneficiary within five years after the participant’s death. Before Windsor, a participant’s same-sex spouse had to be treated as a non-spouse beneficiary for purposes of the rollover rules. Post-Windsor, a participant’s same-sex spouse can roll over an eligible rollover distribution to any eligible retirement plan (e.g., a 401(k) plan or traditional IRA), and if rolled over to an IRA, can delay distributions until the year the participant would have reached age 70½.
Business Owner/One-Participant Plans
A plan covering only the business owner and the owner’s spouse (or the partners of a partnership and their spouses) is exempt from Title I of ERISA as a "one-participant plan", and is not required to file a Form 5500 unless the plan’s assets exceed $250,000. 3 If the plan’s assets exceed $250,000, the plan can file either a Form 5500-SF or a Form 5500-EZ. Before Windsor, a plan covering only an owner and his or her same-sex spouse was covered by ERISA because the plan was treated as covering a person other than an owner and his or her spouse. Post-Windsor, such a plan may not be subject to ERISA and may be exempt from Form 5500 filings.
Under the attribution rules of the Code, an individual can be considered an owner of certain types of assets (e.g., company stock) that they do not actually own if the individual’s spouse (or certain other family members) owns the asset. Before Windsor, stock owned by an individual’s same-sex spouse was not attributed to that individual. Now it must be.
Windsor may have a substantial and unanticipated impact on same-sex business owners who are married. Before Windsor, two businesses, each 100% owned by one party to the marriage, might have been unrelated to each other for qualified plan purposes, but now those same two businesses are related (i.e., members of a controlled group of businesses), because the stock of each spouse is attributed to the other spouse. This could have an adverse impact on nondiscrimination testing, because all employees in a controlled group of businesses may be treated as being employed by a single employer.
ERISA Disclosure Requirements
ERISA requires a substantial amount of plan-related information to be disclosed to plan participants, and in some cases to their spouses and beneficiaries (including alternate payees entitled to benefits pursuant to a QDRO). For example, defined benefit plans must annually distribute a funding notice describing the plan’s funding status. Before Windsor, a plan was not required to provide such disclosures to a participant’s same-sex spouse after the participant’s death unless the same-sex spouse was the designated beneficiary. Now they must provide such disclosures to the same-sex spouse unless the participant elected another beneficiary with spousal consent.
Other Issues Related to Qualified Plans
There are likely several other ways in which Windsor will affect qualified plans. For example, the status of a same-sex spouse as a spouse under federal law may affect the minimum funding requirements for defined benefit plans, the value of a same-sex spouse’s survivor benefit is not considered for purposes of the overall limit on benefits from a defined benefit plan under Code section 415(b), and a same-sex spouse is treated as a spouse for purposes of the incidental death benefit rule under Code section 401(a)(9) and for purposes of the prohibited transaction rules and certain prohibited transaction exemptions under ERISA.
Windsor and Health and Welfare Plans
The Windsor decision will also have a wide-ranging impact on the administration of employer sponsored health and welfare plans. Plan sponsors will need to carefully review plan documents, plan communications, and plan policies and procedures to determine whether amendments (or updates) are necessary in light of Windsor (e.g., to provide for the same treatment of same-sex spouses and opposite-sex spouses, and their children, in states that recognize marriages between same-sex couples). Plan sponsors will also need to work with payroll to ensure that an employee is not charged imputed income for the group health plan coverage provided to the employee’s same-sex spouse (or the same-sex spouse’s child). Below is a summary that highlights the impact of the Windsor decision on employer-sponsored health and welfare plans.
Although further guidance from the IRS may be needed, it appears that employers can permit employees with same-sex spouses who were previously not enrolled in the employer’s group health plan to make a mid-year election to enroll same-sex spouses and their dependent children in health plan coverage.
Taxation of Group Health Plan Benefits
Before Windsor, many employers had already extended group health plan coverage to same-sex spouses of participants and to children of a same-sex spouse who did not qualify as dependents of the participant under Code section 152. These employers were required to impute income to the participant for the employer-paid share of the cost of any plan coverage provided to these individuals because federal law only permitted coverage to be provided on a tax-free basis to married, opposite-sex couples and to persons that qualify as dependents under Code section 152. Post-Windsor, employers should no longer impute income to a participant for federal income tax purposes for the value of group health plan coverage provided to his or her same-sex spouse or the same-sex spouse’s children for the remaining portion of the 2013 calendar year. It is also likely that the employer will need to "correct" previously imputed income calculations made earlier in 2013. Again, IRS guidance on this issue is needed.
Further, the employer will no longer have to pay payroll taxes based on imputed income for an employee who has a same-sex spouse covered under the employer’s group health plan. Employers may have a basis to file for refunds from the IRS for any FICA taxes that the employer has already paid based on imputed income for the health care benefits of same-sex spouses. We expect the IRS to issue guidance on how refunds can be claimed.
Payment on a Pre-tax Basis
An employee may now use pre-tax payroll deductions to cover his or her share of the cost of group health plan coverage for his or her same-sex spouse and the same-sex spouse’s children on a pre-tax basis. Before Windsor, an employee was required to pay for his or her same-sex spouse’s group health plan coverage (and the coverage of the same-sex spouse’s child if not a section 152 dependent) on an after-tax basis.
Health Flexible Spending Accounts, Health Reimbursement Arrangements and Health Savings Accounts
Previously, Health Flexible Spending Accounts ("Health FSAs"), Health Reimbursement Arrangements ("HRAs"), and Health Savings Accounts ("HSAs") could only reimburse qualifying medical expenses of the employee, the employee’s opposite-sex spouse, and the employee’s Section 152 tax dependents. Employees may now also seek reimbursement for the qualifying medical expenses of the employee’s same-sex spouse (and same-sex spouse’s children) on a tax-favored basis through the employer’s Health FSA, HRA, or HSA. Although additional guidance from the IRS is welcome on this issue, it is likely that the employee may receive reimbursement for the eligible claims of his or her same-sex spouse and the same-sex spouse’s children that have been incurred since January 1, 2013.
For Health FSAs, it appears that employees may make mid-year elections to increase their election amounts but further guidance is needed. For HSAs, an employee is already permitted to change his or her HSA election amounts on a monthly basis so there really is no need to provide any special mid-year election opportunity.
Dependent Care Assistance Programs
An employer’s Dependent Care Assistance Program may now reimburse the qualifying Dependent Care Assistance Program expenses of:
- a same-sex spouse’s children; or
- the employee’s same-sex spouse who is physically or mentally incapable of caring for himself or herself.
It seems likely that an employee should be able to make a mid-year election to change his or her DCAP election amount, but again, further guidance is necessary.
COBRA Continuation Coverage
If a same-sex spouse is covered under an employer’s group health plan, he or she is now entitled to the same COBRA continuation coverage rights as any other COBRA qualifying beneficiary. As a COBRA qualifying beneficiary, the same-sex spouse will have an independent right to elect COBRA continuation coverage upon experiencing a COBRA qualifying event (e.g., divorce from the employee, etc.). The same-sex spouse may elect COBRA continuation coverage independently, even if the employee does not elect COBRA coverage. For employers who have already been providing "COBRA-like" coverage to same-sex spouses, it will be necessary to revise plan documents and participant communications to reflect that same-sex spouses now are eligible for COBRA continuation coverage under federal law. For employers who currently do not offer COBRA continuation coverage (or COBRA-like coverage) to same-sex spouses—such coverage must now be offered. Further, the employer should distribute a copy of the plan’s COBRA General Notice to an employee’s same-sex spouse in order to meet its COBRA notice obligations.
FMLA entitles eligible employees to take job protected leave (and receive continuation of group health plan coverage) for certain family and/or medical reasons. An employee with a same-sex spouse is now entitled to take FMLA leave where the FMLA qualifying event involves the employee’s same-sex spouse. For example, an eligible employee may take job-protected leave (and receive continuation of group health plan coverage) to care for the employee’s same-sex spouse who has a serious health condition, or because of a qualifying exigency related to a same-sex spouse’s military leave.
HIPAA Special Enrollment
An employee with a same-sex spouse may now take advantage of certain HIPAA special enrollment rights. HIPAA requires group health plans to give special enrollment opportunities, such as mid-year enrollment, to employees and their dependents. For example, if an employee acquires a new same-sex spouse, he or she is now entitled to enroll his or her same-sex spouse (and the same-sex spouse’s children) in group health plan coverage mid-year. When adding the same-sex spouse to group health plan coverage, the employee also has the right to switch coverage options (e.g., from an HMO plan to a PPO plan if the group health plan offers multiple benefit plan options).
Employer Shared Responsibility Provisions
The employer shared responsibility provisions (more commonly known as the "pay or play rules" or the "employer mandate") provide that an employer must offer plan coverage to 95% of its full-time employees and their "dependents" in order to avoid certain penalties under IRC sections 4980H(a) and 4980H(b). An employer now must offer group health plan coverage to the children of a same-sex spouse (because they are now considered the "stepchildren" of the employee) to avoid potential penalties under the pay or play rules.
The Reach of the Windsor Decision
The Windsor decision leaves unanswered some important questions on the scope and application of the decision. We discuss two of the most important open issues below.
State Law Issues
At first blush, it might seem that by striking down section 3 of DOMA, the Supreme Court in Windsor eliminated all impediments to recognition of same-sex marriages under federal law. But even after Windsor, some same-sex couples may turn out to be "less married" than others because they reside in a state that does not permit or recognize a marriage between two persons of the same sex (a "non-recognition state"), notwithstanding they were married in a state that permits same-sex marriages (a "recognition state"). Whether these couples will enjoy the same status under federal law as same-sex couples residing in a recognition state depends on which state’s laws will be used to determine the couple’s marital status: the laws of the state where the couple resides or the laws of the state where the couple married.
It is imperative that the federal agencies responsible for administration of those laws provide clear-cut rules on which state’s laws will govern determinations of marital status for purposes of these laws.
If the responsible federal agencies say that the laws of the state where the marriage was celebrated are controlling, then all same-sex married couples will enjoy equal status under ERISA and the Code, regardless of where they choose to live. If plans must look to the laws where the couple resides, then a same-sex couple legally married in a state that permits same-sex marriages, but residing in a state that does not, may find that they have the same second-class marital status that existed before DOMA’s federalized marriage definition was struck down.
President Obama has called upon all federal agencies to review all relevant statutes and regulations to ensure the Windsor decision, "including its implications for federal benefits and obligations, is implemented swiftly and smoothly." ERISA plan sponsors can take as an encouraging sign the recent announcement by the United States Office of Personnel Management ("OPM"), which oversees the administration of employee benefits for most federal employees, that "[b]enefits coverage is now available to a legally married same-sex spouse of a Federal employee or annuitant, regardless of the employee’s or annuitant’s state of residency" (emphasis added). This should make it more difficult, although by no means impossible, for the Labor and Treasury Departments to adopt a contrary position when it comes to formulating guidance on how to determine a same-sex married couple’s marital status for purposes of ERISA and the Code.
On the merits, requiring application of the state of celebration rule would seem to have minimal, if any, effect on state policy and administration relating to marriage and would undoubtedly be simpler to administer on a federal agency level—perhaps that was a significant part of OPM’s rationale for adopting its rule. Furthermore, we believe most plan administrators would welcome a state of celebration rule, as it would simplify benefit administration. If state of residence controls, a plan will need to apply different spousal rights rules depending on the state in which the participant and spouse reside, requiring constant tracking of the participant’s residence and the ever-changing state laws on this issue.
Plan sponsors with participants residing in multiple states, including states that currently do not recognize marriages between same-sex couples, should seek advice from their ERISA counsel on the steps to take during the period before there is guidance on this issue.
Does Windsor Apply Retroactively?
A declaration by the U.S. Supreme Court that a law is unconstitutional generally means that the law is not only void going forward, but also that the law is and always has been void. Although the Court in Windsor did not address the extent to which the decision will apply retroactively, the decision may invalidate past actions or inactions by a plan sponsor that were based on section 3 of DOMA. If Windsor invalidates all plan-related decisions for the last 9 years (back to when Massachusetts first permitted same-sex marriages) with respect to participants with same-sex spouses, plan sponsors may have to revisit those decisions and take corrective action.
As states began recognizing marriages between same-sex couples over the last decade, many plan sponsors of qualified plans either opted, or were required by the IRS, to amend their plans to include definitions of "spouse" and "marriage" that were consistent with DOMA. In doing so, plan sponsors had at least two options: the first option was to structure the plan amendments to provide same-sex spouses with most of the benefits and rights afforded opposite-sex spouses under DOMA; the second option was to limit these benefits and rights to DOMA spouses only. The extent to which a plan sponsor may have to retroactively adjust participant elections and benefit payment forms as a result of Windsor may depend to some extent on how it has historically treated marriages between same-sex couples.
The IRS has the authority under Code section 7805(b) to determine the extent to which any ruling will be applied to a qualified plan without retroactive effect. If the IRS grants relief under Code section 7805(b) by applying Windsor prospectively only, or retroactively only to a limited extent or for certain purposes, that relief will address only how the IRS will apply Windsor to plan rules governed by the Code. These would include matters such as the taxability of employer-provided health benefits, the extent to which a plan must be amended to conform to Windsor, the types of plan amendments for which anti-cutback relief is available, and the application of Windsor to plan provisions that until now have been required to differentiate between same-sex and opposite-sex spouses.
It should be noted that any Code section 7805(b) relief from tax qualification violations will not necessarily shield employers from participant-initiated benefit claims or civil actions under ERISA. As a result, plans may face a myriad of claims by individuals who would have been entitled to benefits had they been recognized as a spouse for federal purposes before the Windsor decision.
In any event, until guidance on retroactivity is issued by either the appropriate regulatory agencies or the courts, we believe it would be prudent for plan sponsors to apply Windsor prospectively only, in order to avoid any costly misapplication of the rules.
For the reasons described above, as of the date of this article, we suggest plan sponsors take the following steps to implement the Supreme Court’s decision in the Windsor case:
- To the extent not done already, implement a process to identify same-sex spouses in a manner consistent with the process to identify opposite-sex spouses, and where relevant, their current state of residence.
- Review retirement and health and welfare plans to determine the plans that are affected.
- Determine and implement required administrative changes.
- Communicate changes to participants through a summary of material modifications and other appropriate communications. The communications should describe the changes being made and their effective dates and also inform participants that further guidance is needed (and expected).
- Amend plan documents, and revise summary plan descriptions, insurance contracts, benefit election forms and beneficiary designation forms to the extent required or otherwise necessary. Take into account whether any plan amendments and corresponding revisions to administrative documents can or should be delayed until appropriate guidance is issued.