On Wednesday, June 26, 2013, the United States Supreme Court (the "Court") issued two significant decisions relating to same-sex marriage, both of which will have far-reaching effects on the design and tax treatment of employee benefit plans. Although the effects of Hollingsworth v Perry generally extend only to employees residing in California, the implications of U.S. v Windsor are important for benefit plan administrators across the country.
The practical impact of these decisions on the design and administration of employee benefit plans is still being assessed and the Court left many questions unanswered. For example, while it is now clear that the definition of "spouse" in the Defense of Marriage Act ("DOMA") is unconstitutional, benefit plan administrators must grapple with the absence of a uniform definition of "spouse." A patchwork of state laws governing the definition of "spouse" creates significant uncertainty relating to the tax treatment of same-sex spousal benefits. As we explain below, clear guidance in this area would be welcome.
Hollingsworth v Perry. While this case has a complicated procedural history, and was decided on the narrow issue of "standing," the result is essentially that same-sex marriage in California is once again legally permitted.
The Court's decision in Hollingsworth v Perry involved an appeal by the proponents of Proposition 8 in California to overturn the Ninth Circuit's affirmation of the federal District Court's decision that Proposition 8 was unconstitutional. Proposition 8 was approved by the California voters in 2008 and amended the California Constitution to provide that only marriage between a man and a woman is valid in California. The Court did not address the merits of the constitutional challenge to Proposition 8 and limited its ruling to the issue of whether the proponents of Proposition 8 had standing under federal law to appeal the Ninth Circuit's decision that Proposition 8 was unconstitutional.
The Court held in a 5:4 decision that the proponents of Proposition 8 did not have standing to appeal the Ninth Circuit's decision. The impact of the Court's decision to employers with employees in California is that the holdings of the District Court in Perry v. Schwarzenegger in 2010 and the California Supreme Court's decision in In re Marriage Cases in 2008 (that preceded Proposition 8) are now the law of the land in California. In the Perry case, the District Court declared Proposition 8 unconstitutional and permanently enjoined the state of California from enforcing it. In the In re Marriage Cases, the California Supreme Court ruled that limiting the official designation of marriage in California to opposite-sex couples violated the equal protection clause of the California Constitution Thus, same-sex marriage in California is legal once again.
U.S. v Windsor. In U.S. v Windsor, the Court struck down section 3 of DOMA as unconstitutional because it violates basic due process and equal protection principles under the U.S. Constitution. Section 3 of DOMA denies federal recognition to same-sex spouses. It provides as follows:
In determining the meaning of any Act of Congress, or of any ruling, regulation or interpretation of various administrative bureaus and agencies of the United States, 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 found that section 3 of DOMA has a far-reaching impact as it enacts a directive applicable to over 1,000 federal statutes. The Court found that the definition and regulation of marriage has historically been the realm of the states and that section 3 of DOMA deviates markedly from that tradition because of its reach and intent and it has the effect of disadvantaging a class of citizens that some states have tried to protect. The Court's decision is limited to section 3 of DOMA and did not strike down any other section of DOMA, such as section 2 which allows states to refuse to recognize same-sex marriages performed under the laws of another state.
Impact of the Court's Decisions on Employee Benefit Plans
Section 3 of DOMA is now unconstitutional and the many aspects of federally-governed employee benefit plans involving "spouses" will soon undergo significant changes, but the Windsor decision leaves many questions unanswered.
Retroactive Application of Windsor Decision and Interaction with State Law. The Court in the Windsor decision left open the question whether section 3 of DOMA should be treated as if it was never enacted in 1996, thus potentially making the Court's decision retroactive to 1996. Prior to the enactment of section 3 of DOMA, the Internal Revenue Service relied on state law to determine an individual's status as a spouse for tax purposes. Although the Court did not explicitly address this retroactivity issue, the decision holds that "[T]his opinion and its holding are confined to those lawful marriages." "Lawful marriage" is not defined or further described in the decision, and leaves open to speculation whether "lawful marriages" for federal law purposes (such as taxation) include all same-sex marriages lawfully performed in a state that recognizes same-sex marriage, regardless of where the couple currently resides. For example, is a couple who married in Massachusetts (a state that recognizes same-sex marriage) but currently lives in Texas (a state that does not recognize same-sex marriage) in a "lawful marriage" and therefore entitled to equal protection under federal law? Is that couple therefore entitled to the same tax treatment for employee benefit plan purposes as a couple who married in New York (a state that recognizes same-sex marriage) and who still lives in New York?
Although the Court struck down section 3 of DOMA as unconstitutional, it reiterated that the definition and regulation of marriage has historically been the realm of the states. Currently, 12 states and the District of Columbia explicitly recognize same-sex marriage. In addition, some states that may not permit same-sex marriage do recognize marriages in other states. Until the Internal Revenue Service provides guidance, benefit plan administrators may be required to navigate a patchwork quilt of state laws to determine the appropriate tax treatment of same-sex spouses under their employee benefit plans.
In addition to dealing with changes to the tax treatment of same-sex spouses under employee benefit plans, benefit plan administrators also will need to deal with other design changes to their employee benefit plans, such as eligibility of same-sex spouses to certain "surviving spouse" benefits under retirement plans and to COBRA benefits under group health plans.