The U.S. Supreme Court’s recent decision in U.S. v. Windsorheld that §3 of the federal Defense of Marriage Act (DOMA) is unconstitutional as a violation of the liberty protected by the due process clause of the Fifth Amendment to the U.S. Constitution. Section 3 of DOMA said that for purposes of any federal statute or regulation, “the word ‘marriage’ means only a legal union between one man and one woman as husband and wife and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.” The Court explicitly stated, however, that since the definition and regulation of marriage is within the authority and realm of the separate states and only some states have sanctioned same sex marriage, the Court’s holding is limited to those lawful marriages. Currently, the states that recognize lawful same-sex marriages are:
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What the Supreme Court did not do was invalidate DOMA’s §2 which does not require a state that does not authorize same-sex marriages to recognize a same-sex marriage as valid, even if it was performed in a state that authorized such marriages. This DOMA provision negated the constitution’s full faith and credit clause that would otherwise have required any state to recognize as valid a same-sex marriage legally entered into in another state, though states are free to do so if they choose. For example, New Mexico currently does not permit same-sex marriages, but it does recognize such marriages as legal if validly performed in other states that do permit them. There will likely be future legal challenges to §2 and legislation has been introduced in Congress to eliminate §2, but resolution of this issue by either the courts or Congress is a long way down the road.
While it is clear that the Windsor decision will have an immediate impact on employee benefit plans, it leaves unanswered almost as many questions as it resolves. A few of the most crucial ones are:
- Retroactivity - When a statute is held to be unconstitutional, it often becomes a legal nullity, and is treated as if it had never been enacted. Thus, any obligations imposed are eliminated from the date of its enactment. For DOMA that would be 1996. For prudential reasons, however, the Supreme Court has often modified the retroactive impact of its rulings or declared them to be applicable only prospectively. This is especially true in the benefits area. The Windsor Court, however, has given no indication as to how it intends its decision to apply. In addition, Internal Revenue Code (IRC) §7805(b) gives the IRS authority to limit the retroactive application of judicial rulings in the area of taxation.
Depending on how this retroactivity issue is decided, individuals in same-sex marriages might be able claim benefits for which they were previously deemed ineligible, and both employees and employers could seek tax refunds on FICA and other tax withholdings on imputed income for open tax years. Insurers and plan sponsors are hoping guidance in this area will be forthcoming quickly.
- Which State’s Laws Will Apply? - Since the Windsor holding only applies to same-sex marriages that are legal under state law, which state law will apply for benefit purposes – the state in which the marriage took place or the state in which the claimant is domiciled? This is an especially tricky question as some federal agencies currently look to the state of domicile to assess the marriage status of claimants (e.g., the IRS and Social Security), while others use the state of celebration (e.g., the Department of Defense). For employers that provide benefits in many states, will it be necessary to provide distinctly different benefit programs with respect to same-sex married couples, at least for insured benefits, if not for self-funded benefits, depending on which state law determines a couple’s marital status? Will ERISA’s preemptive power allow employers to ignore state legal requirements defining marriage that are not set forth in their insurance codes? Are states that recognize civil unions or domestic partnerships as entitling participants to the same benefits and responsibilities as marriage, but do not grant full marriage rights (currently: Colorado, Hawaii, Illinois, New Jersey, Nevada and Oregon, with Wisconsin and Wyoming providing more limited recognition) included within the scope of the Windsor decision? Again, regulatory guidance should be forthcoming and, hopefully, fairly quickly.
- How Long Will Plan Sponsors Have to Amend Their Plans? - For tax-qualified retirement plans, will the IRS provide a “remedial amendment period” during which plans can be retroactively amended to comply with this statutory change? Insurers and plan sponsors have more flexibility with respect to amending health and welfare plans or policies, but delay will create confusion on the part of participants and could create a potential for litigation by those who seek to challenge a plan or policy as inconsistent with the Windsor decision. The IRS and the DOL will need to provide regulatory guidance here as well.
- Must Employer Sponsored Plans Now Include Same-Sex Spouses in the Plan’s Definition of “Spouse?” - Nothing in the Windsor decision addressed this question directly. Moreover, neither ERISA nor the IRC defines “spouse,” and the case law provides scant guidance as to whether a plan can define spouse more narrowly than applicable state law. On the other hand, in certain instances ERISA and the IRC do require that if an employer sponsors a plan, certain benefits and rights be provided to a “spouse,” so absent explicit guidance, the question may boil down to whether the spousal right or benefit is a matter of a federal law mandate or a plan-based contractual right. Employers will need to consider, however, that not extending comparable benefits to same-sex spouses as they do to opposite-sex spouses could subject them to litigation challenges, especially in those states that recognize same-sex marriage. With what frequency these lawsuits might be expected and with what success is currently a matter of speculation, but most employers do not want to find themselves in the position of defending the “test” case in the states in which they do business. The legal landscape is changing rapidly, however, and the answers to these speculative questions may be coming sooner than later.
Implications for Employee Benefit Plans
- Qualified Joint and Survivor Annuities (QJSA) – QJSA options, the required default option for married participants in defined benefit plans, and defined contribution plans that provide for an annuity option, will now apply to same-sex spouses, and the consent of the same-sex spouse will be required if benefits are to be provided in a different form.
- Qualified Domestic Relations Orders (QDROs) – Same-sex spouses will be entitled to benefits as an Alternate Payee under a QDRO.
- Qualified Pre-Retirement Survivor Annuities (QPSAs) – QPSAs will apply to same-sex spouses where the employee dies prior to retirement and the spouse has not waived his or her interest in the benefit.
- Default Beneficiaries – In most defined contribution plans, the spouse is the default beneficiary, and same-sex spouses must also be accorded this status.
- Required Minimum Distribution (RMD) – The RMD rules allow spouses to receive post-death payments on a more extended schedule than non-spouse beneficiaries, and these spousal rules will now also apply to same-sex spouses.
- Hardship Distributions – Financial hardship due to a spouse’s medical or educational needs allow for distributions from 401(k) and other defined contribution plans. Now distributions will be permissible if those expenses incurred on behalf of a same-sex spouse create a financial hardship.
- IRC §415 Limits – The value of a spouse’s survivor benefit under a subsidized QJSA is not taken into account for determining the maximum amount to be paid from a defined benefit plan, and this will now apply to subsidized QJSAs of same-sex spouses.
- Rollover Rights – Same-sex spouses now have the same rollover rights as opposite-sex spouses, and not the more limited rollover rights of non-spouse beneficiaries.
Health and Welfare Plans
- No Imputed Income for Health Care Coverage of Same-Sex Spouses – For federal income tax purposes, no income need be imputed to the employee spouse for the health plan coverage provided to his or her same-sex spouse where the marriage is valid under state law. State taxes may need to be paid on imputed income, however, if the state of domicile does not recognize the validity of the marriage. Federal tax imputation will still be required if the person is not the employee’s spouse, nor the employee’s tax-qualified dependent.
- COBRA Continuation Coverage – Same-sex spouses, if covered under an employer’s group health plan, will be eligible for COBRA continuation coverage as a qualified beneficiary.
- Cafeteria Plans – Employees will be able to pay for same-sex spousal coverage on a pre-tax basis, and a legal marriage to a same-sex partner will be a valid change of status event.
- Flexible Spending Accounts (FSAs), Health Reimbursement Accounts (HRAs) and Health Savings accounts (HSAs) – Medical expenses for same-sex spouses will now be able to be reimbursed from these accounts on a tax-advantaged basis to the employee.
- HIPAA Special Enrollment Rights - Plans must now permit special enrollment rights for same-sex spouses to enroll mid-year and allow employees to change their coverage elections on account of a marital status change with respect to a same-sex partner.
- Dependent Care Assistance – Employees can now use pre-tax dollars for care of a same-sex spouse (or other same-sex dependent under IRC §152), though earned income of same-sex spouse could lower the dollar cap available for such coverage.
- Family and Medical Leave Act (FMLA) – The FMLA allows employees to take unpaid leave for the serious health condition of a family member, and defines spouses as husband and wife recognized as such under the state law where the employee resides, including states where common-law marriage is recognized. In such states, FMLA leave, including FMLA-sanctioned military-related leaves, must be permitted for same-sex spouses.
While plan sponsors may want to wait for future guidance before taking major steps with respect to modifying their employee benefit programs, they might well consider undertaking the following:
- If the company does not currently collect information about employees with same-sex partners – whether domestic partners, partners in civil unions or married spouses – it might wish to gather and code that information in the employee records for purposes of benefit plan administration.
- Review all plan documents (i.e., retirement plans – pension, 401(k), 403(b), etc.; health care plans - medical, prescription drug, dental, vision, etc.; welfare plans - life, STD, LTD, etc.; executive compensation plans - non-qualified plans, SERPS, top hat plans, stock option plans, severance plans/agreements, etc.); insurance policies, insurance certificates, benefits booklets, and summary plan descriptions for their definitions of “marriage” and “spouse” to assess how they work (or don’t work) with respect to the holding of the Windsor Court.
- Find out the applicable state law definitions of marriage in the states in which the company does business, and whether the definitions have a judicial, legislative or constitutional basis.
- Determine what modifications, if any, to the definitions of “marriage” and “spouse” applicable in each of your employee benefit plans will be needed in light of the Windsor decision.
- If you currently provide benefits to domestic partners in those states that now recognize same-sex marriage, do you want to require same-sex domestic partners to marry in order to continue to obtain those benefits?
- Review plan administrative practices and payroll systems and update them where needed to be able to provide appropriate benefits and compensation to employees with same-sex spouses. This would entail, at a minimum, changing benefit distribution packages, required minimum distribution procedures, QDRO procedures, Section 125 benefit availability, open enrollment materials, beneficiary designation forms, plan tax notices, ceasing to report imputed income on health care benefits of same-sex spouses, COBRA eligibility, etc. Companies will also have to amend their FMLA policies.
- If a company does business in many states, it will need to review its payroll systems and modify them to reflect the tax consequences of legal same-sex marriage. It might need to go so far as to develop two payroll systems - one for states that recognize same-sex marriage and one for those that do not.
- Review and update summary plan descriptions, employee handbooks, etc. to reflect the required changes and the company’s revised policies towards the provision of benefits to same-sex spouses, and distribute summaries of material modifications to employees so they are aware of these changes.
- Determine whether the company is entitled to file refund claims for open tax years with respect to employment taxes on imputed income, and to inform affected employees that they may also be able to file amended returns to obtain refunds on employment and income taxes on imputed income as well. Those employees should also be advised to file amended W-4 (withholding) forms.