In 1996, President Clinton signed the Defense of Marriage Act (DOMA). Among other things, section 3 of DOMA provides that, for purposes of federal law, "spouse" only includes opposite-sex spouses. On June 26, 2013, the Supreme Court ruled section 3 of DOMA unconstitutional inUnited States v. Windsor. This has a number of important implications for employee benefit plans that cover participants who have same-sex spouses.
The Employee Retirement Income Security Act of 1974 (ERISA) and the tax qualification requirements of the Internal Revenue Code of 1986 (Code) impose a number of requirements on retirement plans where the definition of "spouse" is critical. Among other things:
A plan participant's spouse generally must be the primary death beneficiary unless the spouse waives such status.
Pension plans must pay benefits in the form of a qualified joint and survivor annuity with the surviving spouse as the contingent annuitant unless waived by the spouse.
If the participant dies before commencing benefits, a pension plan must pay benefits in the form of a qualified preretirement survivor annuity to the surviving spouse, unless the spouse has waived such coverage.
A plan generally must pay benefits to an "alternate payee" pursuant to a qualified domestic relations order (QDRO). QDROs typically assign a portion of a participant's retirement benefits to a former spouse.
Qualified plan benefits generally must commence at age 70-1/2 (or, if later, when the participant retires), and the amount of the benefits that must be paid annually depends in part on whether the participant has a spousal beneficiary.
Surviving spouses have more flexibility to "roll over" qualified plan distributions than non-spouse beneficiaries.
Welfare benefits, such as medical benefits and benefits under flexible spending accounts, are also affected by the Supreme Court's ruling. Medical benefits provided to spouses generally are tax-free, while they typically are not when provided to others who do not qualify as tax "dependents" under the Code (and most same-sex spouses do not so qualify). Medical care flexible spending accounts may provide benefits to spouses, but generally not to others who are not tax dependents. The Windsor decision changes how these rules must be applied.
In our experience, most employee benefit plans do not define who constitutes a spouse for plan purposes, and the Court's decision does not dictate how the term must be defined in all circumstances. Plan sponsors should review their plan documents to determine whether any changes are necessary or desirable. Plans that do not define the term spouse may be deemed to include same-sex spouses for plan purposes. In addition, plan administrative procedures will have to be reviewed and revised. For example, retirement plan beneficiary designations of participants with same-sex spouses may no longer be valid if the same-sex spouse did not provide notarized consent. Employers will also have to revamp their tax reporting and withholding systems, as medical benefits provided to same-sex spouses will no longer be on an "after-tax" basis.
This important Court ruling raises difficult transition issues for employee benefit plans that will take time to implement. Among other things, the potential retroactivity of the Windsorholding is unclear. We are hopeful that the Internal Revenue Service and the Department of Labor will issue guidance on some of the key issues that Windsor raises, but plan sponsors should begin planning the transition now.