Section 3 of the federal Defense of Marriage Act (“DOMA”)1 bars same-sex married couples from being recognized as "spouses" for purposes of federal laws, or for purposes of receiving federal benefits based upon being married. Section 2 of DOMA allows states to refuse to recognize same-sex marriages performed under the laws of other states. In U.S. v. Windsor,2 the US Supreme Court ruled that Section 3 of DOMA is unconstitutional under the due process clause of the Fifth Amendment and under equal protection principles. The effect of the Windsor ruling is that, for federal law purposes, a same-sex marriage that is valid under applicable state law will be recognized to the same extent as an opposite-sex marriage. The Court’s ruling does not address the constitutionality of Section 2 of DOMA or of state laws that do not recognize same-sex marriage, and leaves unanswered a number of questions regarding which state’s law applies, under various circumstances, for purpose of determining the validity of a same-sex marriage for federal law purposes.
The Supreme Court itself observed that over 1,000 federal laws and regulations are affected by DOMA. Many of these laws relate to employee benefit plans. Accordingly, employers and other plan sponsors, plan administrators and other plan service providers, as well as employees and plan beneficiaries, will be affected by the ruling. The following describes just some of the federal employee benefit laws and regulations that are affected by the ruling:
- Group Health Benefits. The value of employer-provided health coverage for an employee’s spouse and dependent children is generally excludable from income for federal income tax purposes. In the case of employer-provided health plans that extend coverage to same-sex spouses, DOMA’s prohibition against recognizing same-sex marriage required employers to impute the value of employer-provided coverage for same-sex spouses and their children as additional compensation to the employee (unless the same-sex spouse and dependents otherwise qualified as dependents for federal income tax purposes). The Supreme Court’s decision in Windsor eliminates this requirement, allowing such individuals to qualify as spouses and stepchildren. Employees may be able to file claims for refunds of federal income tax paid on imputed income, and both employers and employees may be able to file for refunds for FICA taxes paid on health-care coverage-related imputed income for prior open years.
- COBRA. Same-sex spouses can now become qualified beneficiaries for purposes of health care continuation coverage under COBRA, including upon divorce.
- Flexible Spending Accounts. As with group health plans, pre-tax coverage was generally unavailable to same-sex spouses and their children under FSAs, unless they otherwise qualified as dependents of the employee for federal income tax purposes. Coverage will now be available to them as spouses and stepchildren.
- Special Enrollment Rights. Employers may have to provide same-sex spouses and dependent children immediate special enrollment rights under group health plans and “change in status” eligibility and elections under cafeteria plans because of the Supreme Court’s decision in Windsor. Guidance from the IRS or the Treasury Department on this issue would be helpful.
Retirement Plans. There are numerous provisions in the Internal Revenue Code (“Code”) and in the Employee Retirement Income Security Act (“ERISA”) that apply to qualified retirement plans and that are affected by the Court’s ruling in Windsor, including:
- Spousal Rights. 401(k) plans and other defined contribution plans require a married participant’s spouse to consent in writing to the designation of a beneficiary other than the spouse. Defined benefit plans must provide pre-retirement survivor annuities to surviving spouses and must distribute a married participant’s benefit in the form of a qualified joint and survivor annuity unless the spouse consents in writing to the distribution of the benefit in another form or to the designation of an annuitant other than the spouse. These provisions will now apply to individuals recognized by the federal government as same-sex spouses. In the case of defined benefit plans, the recognition of same-sex spouses could increase the plan sponsor’s funding obligations.
- Minimum Distributions. The rules under Code Section 401(a)(9) for minimum required distributions from retirement plans that allow a spouse to delay the distribution or commencement of retirement benefits will apply equally to same-sex spouses.
- Hardship Distributions. As a result of Windsor, expenses for the medical care of a same-sex spouse and certain other expenses will qualify more easily under the safe harbor definition of hardship for purposes of hardship distributions under 401(k) plans.
- QDROs. A participant’s account under a defined contribution plan or accrued benefit under a defined benefit plan can now be divided between the participant and the participant’s same-sex spouse or former spouse pursuant to a qualified domestic relations order. (Before Windsor, a same-sex spouse could be an alternate payee only if he/she qualified as a dependent of the participant.)
Equity Compensation Plans Subject to the US Securities Laws. In addition to broad-based qualified retirement plans and welfare plans, the Supreme Court’s holding in Windsor may affect the administration of a company’s equity compensation plans. Many provisions of the securities laws include definitions or rules that take an individual’s marital status into consideration. A partial list of the securities laws that relate to equity compensation plans and that are affected by Windsor include the following:
- Section 16 of the Securities Exchange Act. A same-sex spouse married to an officer or director of a public company subject to Section 16 of the Securities Exchange Act of 1934 may also be subject to the filing requirements and short-swing profit liability rules of Section 16 as an “immediate family member.” A same-sex spouse’s securities holdings may be required to be included in Section 16 reports.
- Rule 701. Rule 701 under the Securities Act of 1933 exempts from the Securities Act’s registration requirements offers and sales of securities by private companies to their employees under compensatory plans or written compensatory agreements, including immediate family members who acquire the securities through a gift or domestic relations order. Rule 701 should now include same-sex spouses in states that recognize same-sex marriages.
- Accredited Investor. The definition of “Accredited Investor” can be an important consideration in meeting the requirements of an exemption from registration under the US securities laws for private company equity compensation plans. For an individual, “accredited investor” is defined in part with reference to the individual’s net worth and yearly income along with that of his or her spouse.
- Disclosure under US securities laws, including proxy disclosures, must be newly assessed in light of the Supreme Court’s decision in Windsor.
- Other Laws. Other laws affected by Windsor include the Family and Medical Leave Act, Medicare secondary payer requirements and laws affecting fringe benefit plans, such as tuition benefits, no additional cost services and employee discounts.
Many Questions Remain
Given Windsor’s sweeping effect on federal laws and regulations, many questions remain. As noted above, the Court’s decision did not address the constitutionality of state laws that do not recognize same-sex marriage, nor did the Court strike down Section 2 of DOMA, which allows states to refuse to recognize same-sex marriage performed under the laws of other states. Future constitutional challenges on these matters are to be expected. For now, there remain numerous employee benefit issues associated with determining whether a same-sex couple is married under state law:
- Currently, whether by law or judicial rulings, 14 states and the District of Columbia allow (or will allow later this year) same-sex marriage. Six states prohibit same-sex marriage by statute and 29 prohibit it in their constitutions. Each state has varying choice-of-law principles for determining which state’s law to apply in a dispute, and some legal commentators have argued that the federal courts have the authority to develop federal choice-of-law rules. Hence, in some circumstances (such as in the case of a couple lawfully married in one state but residing in a state that does not recognize same-sex marriage), it may be difficult for a plan administrator to determine which state’s law to apply for purposes of determining whether the couple should be treated as married. Depending on the answer, if a same-sex couple moves from one state to another, there may be tax and employee benefit implications.
- The extent to which Windsor is retroactively effective for benefit determinations made prior to the Court’s publication of its decision is also unclear.
What Employers and Plan Administrators Should Be Doing Now
Unfortunately, while many questions remain, employers and other plan sponsors, plan administrators and other plan service providers must immediately begin the process of assessing the impact of the Windsor decision on their employee benefit plans, including reviewing plan design, documentation and communications, as well as operational and recordkeeping functions. Future guidance from the Labor and Treasury Departments and the IRS may ease the burdens of transitioning to a post-DOMA world, but the post-DOMA world is here nonetheless.