In U.S. v. Windsor, the United States Supreme Court held that Section 3 of the Defense of Marriage Act (the “DOMA”) is unconstitutional. The DOMA was enacted in 1996 as several states were considering legalizing same-sex marriage. The DOMA contains two operative provisions. Section 2 allows States to refuse to recognize same-sex marriages performed under the laws of other States. Section 3 provides that whenever a federal law (including a statute, regulation or interpretation) uses the term “spouse”, it means a “person of the opposite sex who is a husband or wife” (emphasis provided); and whenever a federal law uses the term “marriage”, it means “only a legal union between one man and one woman as husband and wife.”
In the Windsor case, Edith Windsor claimed the federal estate tax exemption for surviving spouses in connection with her inheritance from Thea Spyer. Edith and Thea had been lawfully married in Canada and, at the time of Thea’s death, lived in New York, which recognizes the Canadian marriage as valid. Thus, under New York law, Edith was Thea’s “spouse” during their lives and after Thea’s death, Edith was Thea’s “surviving spouse”. But, since Edith and Thea were women, in light of Section 3 of the DOMA, they were not spouses for purposes of the federal estate tax exemption for surviving spouses or for any other federal purpose.
The Supreme Court’s decision that Section 3 of the DOMA is unconstitutional has far-reaching implications for employers, especially in connection with their employee benefit plans. There are dozens of provisions in the Internal Revenue Code and ERISA that refer to an employee’s spouse. In most cases, those provisions give an employee’s spouse a tax benefit (such as tax-free employer-provided health benefits) or a statutory entitlement (such as spousal death benefits under a qualified plan and COBRA rights). In a few cases, those laws create an obligation (such as pursuant to a QDRO).
Almost immediately after the Windsor decision, the Office of Personnel Management, which serves as the HR Department for the Federal Government, announced that it is extending federal benefits to same-sex spouses of Federal employees and retirees, including health insurance, life insurance, long-term care insurance, dental and vision insurance, retirement benefits and flexible spending accounts. The IRS issued the following statement:
We are reviewing the important June 26 Supreme Court decision on the Defense of Marriage Act. We will be working with the Department of Treasury and Department of Justice, and we will move swiftly to provide revised guidance in the near future.
We are advising employers to take the following approach now:
- Determine whether you have any employees residing or legally married in the jurisdictions that recognize same-sex marriage. They are: NY, MA, CN, IA, VT, NH, DC, WA, ME, MD, DE, MN and CA (pending).
- Review domestic partner policies. Most domestic partner policies will have to be updated to reflect the fact that spouses in same-sex marriages should be considered spouses (and not merely domestic partners) for all purposes.
- Review all employee benefit plans and administrative policies to determine what rights spouses have thereunder and begin the process of updating plans and procedures to include/address same-sex spouses. For example, COBRA notices will now have to be sent to such spouses. Many of these issues will be addressed by TPAs. You should contact them ASAP to see how they are dealing with this. We do not anticipate that significant amendments to plan documents will be necessary
- Review tax policies. If, for example, you are providing domestic partners with employer health care, you are imputing income for such coverage. That coverage will be provided to same-sex spouses on a tax-free basis now. Our advice is not to change tax reporting systems until the IRS issues guidance. Our experience is that employers who react quickly to this kind of grand policy change end up having to recreate and revisit everything when guidance comes out.
- If you have a cafeteria plan, determine whether the Windsor case is an event that would permit employees to make a 2013 mid-year coverage change under your plan document.
The Windsor case raises significant questions that we hope to be addressed by future guidance, including:
- Is there a retroactive tax effect? Should employers amend previously issued W-2s to treat as non-taxable benefits provided to same-sex spouses? Should employees amend previous tax returns to claim a refund?
- Is there a retroactive ERISA effect? Do same-sex spouses now have a claim for having been denied spousal benefits? For example, does a same-sex spouse who may have been denied COBRA benefits have a claim for retroactive coverage?
- If a same-sex couple is legally married and lives in a state that recognizes the marriage, but one or both of the spouses works in a state that does not, how do the federal employment laws apply? Our current advice is that individuals are considered married or not, and the State of residence would control. Therefore, federal employment laws would recognize the marriage regardless of where the spouses work.
- What happens when a couple lawfully married in one state moves to a state that does not recognize the marriage? This scenario gives rise to a host of complications. Section 2 of the DOMA, which was not the subject of the Windsor case, may lead to the result that this couple ceases to be married if it becomes domiciled in a state that does not recognize same-sex marriages, but the couple would likely be considered “domestic partners” under most employers’ domestic partner policies, subject to applicable state law. Tax reporting would likely have to change. An alternative view has been adopted by the Department of Homeland Security which has announced that it will consider a same-sex couple that is legally married to continue to be considered married for purposes of certain issues arising under federal immigration law if the couple moves to a State that does not recognize same-sex marriages.