In a 5-4 decision issued on Wednesday (U.S. v. Windsor), the United States Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA), which defined marriage as a “union between one man and one woman,” is unconstitutional. The decision will have a wide-ranging impact as there are “over 1,000 federal laws in which marital or spousal status is addressed as a matter of federal law.” The ruling affects multiple areas of federal law, including employee benefits, estate tax, federal income tax and immigration.
For purposes of employee benefits governed by federal law, Section 3 of DOMA prevented same-sex married couples from claiming multiple spousal benefits granted under federal law and adversely impacted the taxation of other spousal benefits. With the holding that Section 3 is unconstitutional, same-sex married couples may now claim spousal benefits previously denied or in some cases receive spousal benefits on a tax-free or pre-tax basis instead of via imputed income.
Under employee benefit plans, how far has the door been opened to claim spousal benefits for same-sex couples? Without a federal definition of marriage or spouse, it appears that the terms will now be defined by state law. However, not all states, including Michigan, and Illinois, recognize same-sex marriages. The majority opinion in Windsor expressly limited its holding to couples in states where marriage is recognized as lawful. In other words, the Windsor holding is limited to same-sex marriages that are permitted or recognized as lawful by state law.
At the present time, there is no uniformity in the treatment of same-sex marriages among states. Twelve states (Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington and the District of Columbia) currently issue licenses for same-sex marriages (including state statutes that go into effect in the next two months). Some states do not issue licenses for same-sex marriages but recognize them if performed in a state that does issue them. Normally, a state is required to recognize the validity of a marriage lawfully performed in another state. However, that requirement is currently overridden by Section 2 of DOMA, which provides that states are not required to recognize the validity of another state’s laws permitting same-sex marriages. The validity of Section 2 of DOMA was not before the Court in Windsor.
There are still many questions regarding the impact of the Windsor holding on employee benefit plans. In particular, it is not clear whether the holding is prospective or retroactive. Can a same-sex spouse residing in a state that recognizes same-sex marriages, who two years ago was denied a qualified joint and survivor spousal pension annuity now retroactively apply? The IRS will need to issue guidance specifying the amendment period during which certain tax-qualified retirement plans may be amended to comply with the ruling without losing their tax-qualified status. For pension plan purposes, it appears that same-sex couples residing in states that recognize same-sex marriages will now be eligible for spousal qualified joint and survivor and qualified pre-retirement joint and survivor annuity benefits, hardship withdrawals may now be available for their expenses under certain defined contribution retirement plans, preferential spousal pension rollover and minimum distribution rules may now apply, and they can obtain a qualified domestic relations order (“QDRO”) to divide pension assets in the event of divorce. Under medical plans, a same-sex spouse will be able to receive medical benefits on a pre-tax basis without imputed income, obtain COBRA medical coverage, and become eligible for the special enrollment rights under HIPAA and spousal rights under flexible spending accounts, health savings accounts and health retirement accounts. Some same-sex spouses will now also qualify for multiple employee fringe benefits available for spouses, including employee discounts, access to employee gym facilities and tuition reimbursement.
However, under the Windsor holding, it appears that employers only will be required to extend spousal benefits to same-sex spouses of employees and retirees who reside in states that recognize same-sex marriages and not in states that do not. The potential for additional administrative burdens and payroll issues may be considerable for some employers. An employer in a state that does not recognize same-sex marriages, would not be required to provide qualified joint and survivor spousal pension annuities to the same-sex spouses of its employees residing in its home state, but it will be required to provide them to the same-sex spouses of employees and retirees who live five minutes away, just over the state line, if that state recognizes same-sex marriages. Those who witnessed the enactment of ERISA in 1974, may remember that a major force behind its adoption was a perceived need for federal preemption to permit employers to provide uniform employee benefits to employees in all states, without the need to navigate numerous state laws pertaining to employee benefits. ERISA’s concept of federal preemption for employee benefit plans appears to have lost some leverage!
Our recommendation on what employers should do? IRS guidance should be forthcoming shortly on the prospective/retroactive application issues of the Windsor holding, as well as providing a designated amendment period for the adoption of necessary tax-qualified retirement plan amendments – particularly with those plans that currently cross-reference the marriage definition from DOMA. In the meantime, employers should start reviewing their employee benefit plans to see which plans will require amendments and determine what spousal policy the employer wants to follow going forward with employees and retirees who reside in states that do not recognize same-sex marriages. Payroll system and benefit plan administrative practices also should be considered in light of the new changes.