What you need to know:
The Supreme Court has ruled that the Defense of Marriage Act, a federal law defining "marriage" as "a legal union between one man and one woman," deprives same-sex spouses of the equal liberty that is protected by the Fifth Amendment. As a result, same-sex couples legally married under state law will now be treated as spouses under federal law, including the US tax code, the Affordable Care Act, COBRA and ERISA.
What you need to do:
The Supreme Court’s ruling takes effect immediately. Employers will need to review their employee benefit plans to be sure they do not discriminate between same-sex and opposite-sex spouses in either form or operation. Special attention should be given to the beneficiary elections of employees with same-sex spouses under qualified retirement plans, as an election naming anyone other than the employee’s spouse now requires spousal consent. In addition, employers may need to update tax-reporting systems, enrollment forms, distribution-election forms and tax notices, revise plan documents and summary plan descriptions and issue summaries of material modifications.
What the Decision Means for Employers
More than 1,100 federal laws give rights and benefits to married couples. Here are some examples of how the ruling impacts retirement, welfare and tax benefits:
- The value of health benefits provided to a same-sex spouse by an employer will no longer be subject to US federal income tax.
- Employees with a same-sex spouse will now be able to contribute to health savings and flexible spending accounts at the same levels as an employee with an opposite-sex spouse.
- Health plans will need to provide coverage under COBRA to an employee’s same-sex spouse who is covered by the health plan upon the occurrence of a qualifying event (such as divorce or the employee’s termination of employment).
- Employers subject to FMLA must treat same-sex spouses like opposite-sex spouses for purposes of FMLA protections. For example, FMLA-covered employers must allow eligible employees to take up to 12 weeks of unpaid leave to care for a seriously ill same-sex spouse.
- Health plans will be required to provide special enrollment rights following an employee’s marriage to a same-sex spouse.
- Retirement funds may now be set aside in an individual retirement account on a pre-tax basis for non-working same-sex spouses. Same-sex spouses will now receive any preferential tax treatment currently accorded to the retirement funds of opposite-sex spouses, including the spousal rollover of an IRA at death.
- Fringe benefits provided by an employer to an employee’s same-sex spouse will no longer generate taxable income to the employee.
- The Qualified Joint and Survivor Annuity and Qualified Pre-Retirement Survivor Annuity rules affecting defined benefit pension plans will now apply to same-sex spouses.
- An employee with a same-sex spouse will now be required to obtain consent from his or her spouse to name a non-spouse beneficiary under a qualified retirement plan.
- If a same-sex couple divorces, benefits in a qualified retirement plan may now be split pursuant to a QDRO.
- Qualified retirement plans will now need to treat same-sex spouses as spouses for purposes of the required minimum distribution provisions.
- A hardship distribution from a qualified retirement plan will now be allowed for the need of a same-sex spouse.
- Under Section 409A, an “unforeseeable emergency” distribution may now be made to a participant from a nonqualified deferred compensation plan due to the severe financial hardship of the participant resulting from an illness or accident of the participant’s same-sex spouse.
It is possible that the ruling will be given retroactive effect. This would likely allow individuals to request refunds of taxes they paid on employer-provided benefits that would have not been taxable but for DOMA. While this would primarily affect employees, it could affect employers as well. For example, an employer could request a refund of payroll taxes the employer paid on imputed income of an employee that was attributable to healthcare coverage provided to a same-sex spouse.
The ruling does not require states to allow same-sex couples to marry, nor does it require states to recognize same-sex marriages performed in the US jurisdictions which allow it (Connecticut, Delaware [as of July 1], the District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota [as of August 1], New Hampshire, New York, Rhode Island [as of August 1], Vermont, Washington, and likely California, barring further legal action, once the Supreme Court’s judgment in Hollingsworth v. Perry is officially received by the Ninth Circuit in late July).
This raises various practical issues. For instance, it is not clear whether it is the marriage rules of the state in which the marriage is celebrated or the rules of the state in which the couple resides that govern whether the couple is married for purposes of certain federal laws. In addition, it is not uncommon for an employee to reside in one state and work in another. If the laws of the two states differ, which should govern whether the employee is "married" for purposes of an employer’s plans? For that matter, how does an employer administer a plan that covers employees in multiple jurisdictions, some of which allow same-sex marriage and some of which do not? We expect that the Internal Revenue Service and the Department of Labor will begin providing guidance on these and other open issues in the coming months.