On June 26, the Supreme Court issued its long awaited decision in United States v. Windsor, striking down section three of the Defense of Marriage Act (DOMA). Section three of DOMA provided that for purposes of federal law “marriage” meant only a legal union between one man and one woman and “spouse” referred only to a person of the opposite sex who is a husband or a wife. However, the Court left intact section two of DOMA, which allows a state to refuse to recognize a marriage performed under the laws of another state.

Prior to Windsor, the DOMA definitions of “marriage” and “spouse” meant that same-sex marriages were not recognized for federal law purposes even if such marriages were allowed or recognized under state law. This, in turn, resulted in legal complexities in those states which allowed or recognized same-sex marriages, especially in the field of employee benefits.

After Windsor, the definitions of “spouse” and “marriage” under federal statutes will be based on state law definitions of such terms. As a result, for states that allow or recognize samesex marriage, a barrier no longer exists for such recognition under federal law; a number of rights and privileges granted to opposite-sex married couples may now effectively be granted to same-sex married couples. For states that do not allow or recognize same-sex marriage the results are less clear.

Employee Benefits Issues

Many aspects of employee benefit plans will be affected by Windsor since the concepts of marriage and spouse are important elements of retirement and welfare plans, as well as the laws that govern them (including ERISA, COBRA, and HIPAA).

The Court in Windsor did not address the practical effects of implementing its decision; nor have the Internal Revenue Service (IRS) or Department of Labor issued any guidance on the decision. As a result, there are many unresolved employee benefit issues, including what effect, if any, the Windsor decision will have in those states that do not recognize same-sex marriages. It appears that the impact of the Windsor decision will be significant in those states that allow or recognize same-sex marriage (such as California, New York and Maryland), although the precise contours of that impact are difficult to determine.

Windsor may affect, among other things, employee benefit plan documents and forms (requiring various amendments), plan operations and participant communications. In certain situations, it may no longer be possible to limit the definitions of marriage and spouse to opposite-sex marriage and opposite-sex spouses.

Below is a brief summary of certain employee benefit provisions relating to spouses and spousal rights that may be affected by Windsor.

Welfare Plans

Health Care Coverage (Imputed Income). Under federal law, coverage under an employer-provided health plan generally is provided on a tax-free basis to an employee and his or her spouse and dependents. Coverage provided to a samesex spouse who is not a legally recognized spouse under state law is taxable to the employee as imputed income and subject to federal income, FICA and FUTA taxes.

Cafeteria Plans. A cafeteria plan may permit a participant to make mid-year changes to the participant’s benefit elections if the participant experiences certain qualifying events, including a change in marital status or an event giving rise to HIPAA special enrollment rights (such as loss of coverage by a participant or his or her spouse under the spouse’s group health plan).

Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs). Qualifying expenses for a participant’s spouse can be reimbursed tax-free under an FSA, HSA and HRA.

Dependent Care Assistance Plans (DCAPs). Expenses incurred for the care of a participant’s eligible dependents, including his or her spouse, can be reimbursed tax-free under a DCAP.

COBRA. COBRA requires that certain group health plans provide continuation of health coverage to a participant and his or her spouse and dependents covered under the group health plan upon the occurrence of certain qualifying events. Qualifying events include, but are not limited to, a participant’s divorce or separation, death or termination of employment.

Retirement Plans

Qualified Joint and Survivor Annuities (QJSAs) and Qualified Preretirement Survivor Annuities (QPSAs). Defined benefit plans and certain defined contribution plans known as money purchase pension plans are required to provide a QJSA as the automatic form of retirement benefit, and to offer certain optional joint and spousal survivor annuities (known as qualified optional survivor annuities or QOSAs) to a participant who is married at retirement, and the participant may not elect another form of benefit, without the consent of his or her spouse. In addition, such plans are required to provide a QPSA to the surviving spouse of a vested participant who dies prior to retirement, unless the participant has waived the QPSA with his or her spouse’s consent.

Beneficiary Designations. Defined contribution plans that are not subject to QJSA requirements generally are required to provide that a participant must designate his or her spouse as his or her beneficiary under the plan unless the spouse consents to the designation of another beneficiary.

Rollover Distributions. A surviving spouse who receives a benefit upon the death of a participant under a retirement plan has the right to roll over the benefit to another employer’s eligible plan or to an IRA, provided that the benefit is an eligible rollover distribution. All others may only roll over such a benefit to an inherited IRA.

Hardship Distributions. A 401(k) plan may allow hardship withdrawals to pay for a spouse’s medical, funeral or tuition expenses.

Qualified Domestic Relations Orders (QDROs). All or a portion of a participant’s retirement plan benefits may be assigned to the participant’s spouse or former spouse pursuant to a QDRO.

Required Minimum Distributions (RMDs). The surviving spouse of a participant who dies before commencing benefit payments may elect to delay RMDs until the participant would have attained age 70 1/2.

Open Issues

As noted above, a number of unresolved issues remain in the aftermath of Windsor. A few of the most important are the following:

  • „„ Perhaps the most important issue to be answered is how the Windsor decision will apply among the states in light of state law differences with respect to recognition of same-sex marriages. If an employee and his or her same-sex spouse both reside and are employed in a state that recognizes same-sex marriage, the samesex couple presumably will be treated the same as an opposite-sex couple. Other situations are less clear, however, including the following where:
    • an employee and his or her same-sex spouse were married in one state, but the employee and/or the same-sex spouse subsequently moves to a state that does not recognize same-sex marriage;
    • an employee and his or her same sex spouse reside in a state that recognizes same-sex marriage, but the employee works for an employer in a state that does not recognize same sex marriage; or
    • an employer has operations in multiple states, some of which recognize same-sex marriage and some of which do not, and employees’ employment locations may change from one state to another due to transfers.

In such cases, it is unclear which state law governs and guidance is required from the IRS and/or other regulatory agencies on the treatment of same-sex couples.

  • „„ Another open issue is the required timing, both for plan document changes and for operational changes. To date, neither the IRS nor other regulatory agencies have issued any guidance on the required effective date for adopting plan amendments and implementing operational changes. Presumably the IRS and other agencies will allow a reasonable transition period before amendments are required to be adopted and operational changes implemented.

What Employers Should Do Now

With so many open questions, employers should not rush into action at this time. Instead, we advise that employers: „„ Review their employee benefit plan documents and forms (such as SPDs, distribution packets, QDRO procedures and beneficiary designation forms) to identify provisions that might need to be modified, paying particular attention to whether the definition and use of the terms “marriage” and “spouse” incorporate the DOMA definitions of such terms.

  • „„ Review plan administration to identify any operations or procedures that might need to be modified.