In the summer of 2013, the Supreme Court issued a decision in U.S. v. Windsor, striking down a key provision of the Defense of Marriage Act (DOMA) and eliminating the requirement that federal law recognize only marriages between a man and a woman. Since then, the Internal Revenue Service (IRS) and Department of Labor (DOL) have been busy issuing guidance on how the Windsor decision impacts employer-sponsored retirement and health plans.
Both the IRS and DOL have adopted a “state of celebration” rule for employee benefit plan purposes. This means that the state where the marriage takes place, not the state of residence, determines whether a couple is entitled to spousal rights and benefits. Tax benefits apply only to marriages, not to civil unions, registered domestic partnerships or other formal arrangements recognized under state law.
Now, legally married same-sex spouses have the same federal tax rights as opposite-sex spouses, regardless of their state of residence. This has important implications for qualified retirement plans, group health plans, health FSAs, dependent care FSAs, and cafeteria plans. For example:
- Qualified benefits provided to an employee’s lawfully married spouse are excludable from the employee’s income for federal tax purposes.
- Pre-tax payroll deductions under a cafeteria plan can be made to pay for benefits for same-sex spouses.*
- A legal marriage between same-sex partners can be treated as a change in status for purposes of mid-year cafeteria plan election changes.*
- Reimbursements can be made under a healthcare flexible spending account for eligible medical expenses incurred by or for a same-sex spouse.*
- Same-sex spouses are subject to the joint deduction limit for contributions to a health savings account.
- Same-sex spouses who file joint income tax returns are subject to the $5,000 annual limit on contributions to a dependent care flexible spending account, and same-sex spouses who file separately are subject to the $2,500 limit.
- Same-sex spouses are eligible for qualified joint and survivor annuities (QJSA) under qualified retirement plans.
- Spousal consent rights under qualified retirement plans now apply to same-sex spouses.
- Same-sex spouses are eligible for qualified pre-retirement survivor annuity (QPSA) benefits offered under retirement plans.
- Same-sex spouses are eligible to submit qualified domestic relations orders (QDRO) under qualified retirement plans.
- Spousal rollover rights apply to same-sex spouses in qualified retirement plans.
- Hardship distributions can be taken from a 401(k) plan on account of qualifying spousal expenses.*
- Same-sex spouses covered by a group health plan are COBRA qualified beneficiaries.
*It is important to note that the rights enumerated above may or may not apply in a particular case, depending on the terms of the applicable employee benefit plan.
The Windsor decision does not obligate employers to offer health or welfare benefits to same-sex spouses and recent IRS and DOL guidance does not resolve state law issues pertaining to the definition of “spouse” and the taxation of employee benefits under state laws.
Employers should review their retirement and health plan documents, SPDs, employee handbooks and forms to ensure that the definition of “spouse” is compliant with the law and consistent with their intentions. Some plan language may be flexible enough to permit same-sex participation without plan amendments, while other plan documents may require eligibility clarification. For example, many health and welfare plans will arguably cover same-sex spouses if they generally refer to spouses “as recognized under the Internal Revenue Code.”