In a decision that will have far-ranging implications for employee benefit plans, last week the U.S. Supreme Court struck down a key provision of the Defense of Marriage Act and required the federal government to recognize same-sex marriage. In 1996, Congress enacted the DOMA, which defined marriage as "only a legal union between one man and one woman as husband and wife. . . ." Last week's decision declared that section of DOMA to be unconstitutional, so couples who have married in states which recognize same-sex marriage are now entitled to the same federal protections and privileges that come with traditional marriage, including in the employee benefits arena.
Factual Background of Windsor
In 1963, Edith Windsor and Thea Spyer met in New York City and began a long-term relationship. They registered as domestic partners when New York City gave that right to same-sex couples in 1993. In 2007, they traveled to Canada to be lawfully married under Canadian law since Ms. Spyer's health was deteriorating, but they continued to reside in New York City. The State of New York deemed their marriage to be valid because of the city ordinance recognizing domestic partnerships.
Ms. Spyer died in 2009 and left her entire estate to Ms. Windsor. Because DOMA denied federal recognition to same-sex spouses, Ms. Windsor did not qualify for the marital exemption from the federal estate tax. Without that exemption, Ms. Windsor paid more than $360,000 in estate taxes. She then filed suit against the Internal Revenue Service for a full refund by challenging the federal definition of marriage in DOMA, and her case eventually landed in the Supreme Court.
The Court's Reasoning
In reaching its 5-4 decision, the Court first noted that the definition and regulation of marriage has historically been treated as a state, not federal, matter. Since DOMA is a federal law, it affected marriages in all states, including those states which have opted to recognize same-sex marriage. The effect in those states was that the marriages of same-sex couples were valid under state law but invalid for purposes of all federal laws.
The Court found the definition of marriage in DOMA to be unconstitutional because it violated basic due process and equal protection principles applicable to the federal government. Writing for the majority and joined by Justices Breyer, Ginsburg, Kagan, and Sotomayor, Justice Anthony Kennedy said that "[t]he avowed purpose and practical effect of the law here in question are to impose a disadvantage, a separate status, and so a stigma upon all who enter into same-sex marriages made lawful by the unquestioned authority of the States. Were there any doubt of this far-reaching purpose, the title of Act confirms it: The Defense of Marriage."
Issues and Challenges for Employee Benefit Plans
The Windsor decision affects the application of more than 1,000 federal laws, including laws which apply to the administration of employee benefit plans, such as certain sections of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. Benefit plans of all types are now faced with significant decisions about how the Windsor decision will affect the treatment of same-sex spouses. These decisions will be especially difficult because currently there are no regulations or guidance as to what is considered legally correct treatment of same-sex spouses.
In the states where same-sex marriage is recognized, decisions will be more straightforward because benefit plan administrators should be able to treat same-sex spouses the same as all other married couples. Same-sex marriage is currently recognized in Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington state, and in the District of Columbia. Also, as of last Friday, California again recognizes same-sex marriage after a surprisingly fast decision by the U.S. Court of Appeals for the Ninth Circuit permanently refusing to enforce the state's Proposition 8 gay marriage ban. So, in these states, we expect benefit plan administrators to have a relatively easy transition for covered same-sex spouses.
The real challenges arise in situations like the following: a same-sex couple gets legally married in a state which recognizes same-sex marriage but then moves to a state which does not. What then? These situations will be especially complex because the Supreme Court struck down only the definition of marriage in DOMA, which was Section 3 of the law. Section 2 was not at issue in or affected by the Windsor decision, and it says that no state "shall be required to give effect to any public act, record, or judicial proceeding of any other state . . . respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other state. . . or a right or claim arising from such relationship." In other words, a state that does not recognize same-sex marriage is not required to recognize the legal marriage of a same-sex couple married in one of the jurisdictions listed above.
This tension between state laws for couples who move from one state to another will be felt by retirement plan administrators when determining beneficiary/survivor rights under 401(k) plans and other pension plans. Administrators for both self-funded and insured health plans will need to consider how to approach covering same-sex spouses as dependents of active employees, spousal COBRA obligations after a qualifying event, and structures of health flexible spending accounts. In addition, since health coverage for same-sex spouses is no longer a taxable benefit under the Internal Revenue Code, payroll taxes and withholdings will need to be reviewed and probably revised for same-sex couples.
Until guidance is issued in some form on the treatment of legally married same-sex spouses in other states where such marriages are not legal, employers and plan administrators should take a reasonable, good-faith approach applied on a consistent basis across all locations. Although it is impossible to know with any certainty, we expect that when the federal government does issue guidance, it will largely favor recognizing same-sex marriages for benefit plan purposes even in states in which such marriages are unlawful.
In any event, employers should start considering these issues now so that they will be as prepared as possible when employees ask questions or when an enrollment or benefits decision needs to be made for a same-sex couple. Once organizational decisions are made, then employers will need to review and possibly amend their plan documents and summary plan descriptions accordingly.