In United States v. Windsor1, the Supreme Court held that Section 3 of the Defense of Marriage Act (DOMA),2 which defines marriage as solely a legal union between two people of opposite sexes, is unconstitutional. While we expect the IRS to issue guidance on this soon, this alert outlines issues to consider as employers prepare for modifications to their plans.
In States that Permit Same Sex Marriage
Prior to Windsor, because of DOMA, in general employers could not provide tax favored benefits under the Internal Revenue Code to same sex spouses in states that permitted same sex marriage (unless the same sex spouse was considered a tax dependent under Section 152 of the Internal Revenue Code, which was not common). Employers who provided such benefits would either impute the value of those benefits as income to the employee for Federal tax purposes or would require the employee to pay for those benefits on an after-tax basis. With the finding that Section 3 of DOMA is unconstitutional, in the 13 states (and the District of Columbia) where same-sex marriage is legal,3 benefits provided to same-sex spouses, just like benefits provided to opposite sex spouses, will receive favorable tax treatment on both the state and federal level.
For example, this means that employers may permit employees to pay for their same sex spouse’s health insurance pre-tax, and no imputation of income is required. Also, eligible expenses for an employee’s same sex spouse (and the same sex spouse’s children) will now be eligible for reimbursement under a cafeteria plan.
In States that Do Not Permit Same Sex Marriage
For employers with employees in the 35 states with “mini-DOMA” laws or which have amended their constitutions to prohibit same-sex marriage,4 the impact of Windsor is less clear.
For employers who provide benefits to same sex spouses in these states, it is possible that there will be different treatment for health and cafeteria plan benefits for federal tax purposes (the benefits would not be taxable) than for state tax purposes (the benefits would be taxable.) This issue is currently still open.
Must Employers Provide Benefits to Same Sex Spouses?
In states that recognize same-sex marriage, employers who sponsor insured group health plans (or group health plans that are not subject to ERISA) will likely be required to provide health insurance to same sex spouses.
In states that do not recognize same-sex marriage, state insurance law will not mandate that employers with insured group health plans provide health insurance to same sex spouses.
For employers with ERISA-covered self-funded group health plans which are not subject to state insurance law, the issue of whether to exclude same sex spouses if the employer offers coverage to opposite sex spouses is complex. These employers should consult with benefits counsel.
Current IRS guidance (issued prior to DOMA) indicates that treatment of same-sex spouses will be based on whether the state in which the employee resides recognizes the employee’s marriage. In states that recognize same-sex marriage, following Windsor, employers with tax-favored retirement plans will need to address the following:
- QDROs. A same-sex spouse can now be an alternate payee and receive a QDRO.
- Eligible rollover distributions. A same-sex spouse will now be eligible to receive a spousal rollover to an IRA or a plan.
- Minimum required distributions. A same-sex spouse is now eligible for a longer delay before distribution under these rules.
- Qualified joint and survivor annuities and qualified pre-retirement survivor annuities. A same-sex spouse is now protected by these rules.
- Loans. If a plan’s loan rules require spousal consent, a same-sex spouse must now provide that consent.
- Hardship distributions. An employee can now receive a hardship distribution due to a same-sex spouse’s medical, tuition, and funeral expenses.
- Default beneficiaries. If the plan provides that the benefit is to be paid to a spouse, a same-sex spouse must now receive the benefit.
We believe it likely that the IRS will issue guidance on the impact of Windsor in the near future that provides (at least for benefit plans) that if an employee is married the marriage will be recognized regardless of where the employee resides. However, until such guidance is issued, in states that do not recognize same-sex marriage, it is not clear that such changes are required under the Code (based on the IRS guidance prior to DOMA).
Review their health and retirement plans’ definitions of spouse. Employers whose plans cite DOMA explicitly will need to change their documents.
- Employers with self-insured plans or individually designed retirement plans can adopt their own explicit definitions but should consider state law, as well as discrimination issues, in framing these definitions.
- Employers with insured plans should contact their insurance providers to discuss the interpretation of the definition of spouse under the insured plan.
- Employers should remember to review Flexible Benefit Plan and Life Insurance definitions.
- Consider the eligibility of children of same sex spouses who now are the step children of employees for federal tax purposes.
- Consider how to treat domestic partners after Windsor. For example, some employers may no longer allow domestic partner coverage in states that permit same sex marriage.
- Review their enrollment process so that same sex spouses are properly identified and accorded the proper tax treatment.
- Review and change the tax treatment of health benefits for same sex spouses. For example, employees may cover their same sex spouse’s health care coverage on a pre tax basis.
- Consider how to handle employees’ requests for help in seeking a refund from the IRS for taxes paid on the value of a same sex spouse’s health benefits.
- Consider whether to submit a refund request to the IRS for payroll taxes paid on amounts imputed to employees for same sex domestic partners.