On June 24, 2011, when Governor Cuomo signed the Marriage Equality Act, New York became the sixth state to grant same sex couples the right to legally marry. As sponsors of various types of employee benefit plans, clients should consider the legal and practical impact of marriage by same sex couples in New York on their plan administration.
Notwithstanding the change in New York law, the federal Defense of Marriage Act (DOMA) requires the term "spouse" to be interpreted under the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code (Code) and other federal laws as only meaning a marriage partner of the opposite sex. As a result, many provisions of federal law intended to protect spouses will not apply to same sex couples regardless of the legal status of their marriages under state law. Although several cases challenging DOMA are making their way through the federal court system, with the Department of Justice now declining to defend its constitutionality, DOMA remains good law until and if it is finally declared unconstitutional (or repealed). In the meantime the incongruity between state and federal law regarding the definition of "spouse" has the potential for creating confusion among plan participants and costly administrative errors.
For example, consider the following facts: (i) a 401(k) plan that defines "spouse" with specific reference to DOMA; (ii) a deceased participant, newly married to a same sex partner, with grown children from an earlier relationship; (iii) no beneficiary designation on file for the deceased participant; (iv) a default beneficiary provision in the 401(k) plan awarding the account balance in the following order-spouse, children, estate; (v) an account balance of $500,000 in the name of the deceased participant, and (vi) personnel records indicating the deceased participant was married at the time of his death. Based on those facts, if the plan paid the $500,000 account balance to the deceased participant's surviving partner, and could not recover the money, the employer would potentially be liable for an additional $500,000 owed under the terms of the plan to the deceased participant's children. While the probability of this combination of facts occurring may be relatively low, it illustrates the importance of knowing exactly what your plan says, how plan administration interfaces with payroll, human resources and other sources of employee data, and the legal requirements of both federal and state law.
DOMA may also impact the tax treatment of certain benefits, complicating plan administration. This may be unavoidable if you offer medical coverage for employees and their spouses under an insured arrangement, and the carrier is subject to New York law. DOMA will not limit the coverage available under the policy, but it will require you to impute taxable income for the value of the coverage provided to a same sex spouse if the spouse does not otherwise qualify as a dependent under the Code. Even if you have a self-insured medical plan, and could theoretically avoid dealing with imputed income by limiting eligible spouses using the restrictive DOMA definition, the employee relations repercussions would likely make that an unacceptable alternative.
Companies that have adopted domestic partner policies are likely to have considerable experience dealing with the tax complications of extending medical coverage and other welfare benefits to individuals who are not spouses or dependents within the meaning of the Code, and may also have added optional provisions to their retirement plans designed to negate some of the effects of DOMA. Even companies with experience providing benefits to same sex partners will face additional complications now that marriage is an available option, and will need to review their employment policies and plan terms to identify unintended consequences of the change in New York law-for example, making some same sex partners ineligible for benefit coverage, because "domestic partner" is defined under the terms of the plan or policy with reference to the inability to legally marry.
Employees who marry as a result of the change in New York law may be lulled into a sense of complacency regarding the protections afforded their spouses under employer-sponsored plans, and may not realize that federal laws intended to protect spouses from inattention, procrastination and ignorance, among other things, will not benefit their same sex partners. Employers might want to consider some form of communication emphasizing the need for affected employees to carefully consider how the change in New York marital law will impact their and their partners' benefits, particularly with respect to ensuring that their partners are treated as their beneficiaries if that is their intent.