Qualified Retirement Plans
ERISA (which governs all plans except government and church plans) requires retirement plans to grant certain spousal rights, this decision will have an impact on these types of required plan terms:
- Spousal Rights under Pension Plans – for pension plans and other qualified retirement plans that offer an annuity form of payment, the qualified joint and survivor annuity, qualified optional survivor annuity, and qualified pre-retirement survivor annuity rules now apply to same-sex spouses; spousal consents required for benefit elections made under these plans, including or for participant loans, will now also apply to same-sex spouses. In many plans, this will add cost, because your plan may not have provided a death benefit previously for an employee who was married to a same-sex spouse.
- Spouse as Default Beneficiary – for defined contribution plans, such as 401(k) plans, that do not offer an annuity form of payment, a same-sex spouse will be the default beneficiary if a different beneficiary has not been named with spousal consent.
- Qualified Domestic Relations Orders – same-sex couples can arrange for division of a participant's plan benefit by a QDRO if the marriage is dissolved.
- Required Minimum Distributions – the rules allowing a spouse of a deceased participant to defer the start date of required distributions until the year the participant would have attained age 70½ is now extended to a same-sex surviving spouse.
- Hardship Distributions – hardship distributions may be allowed for hardship events affecting a member of the family of an employee (for example, medical, education or funeral expenses), now including a same-sex spouse.
- Rollover Distributions – the spouse of a deceased participant is allowed to make an eligible rollover distribution of the participant's account balance to their own IRA or another eligible retirement plan, rather than to an inherited IRA. This will now apply to same-sex spouses.
Nonqualified Retirement Plans – Although the provisions of many nonqualified retirement plans are strictly a matter of contract law, the provisions of other nonqualified plans are tied to the qualified retirement plan rules, either directly or indirectly. All nonqualified retirement plans should be examined carefully to determine the effect of the DOMA decision on their provisions, on the benefits they provide, and on how they are administered.
Stock Option Plans - Certain transfers of non-statutory stock options to an employee's former spouse in the case of divorce receive tax-favored treatment; this will now apply to transfers to a former same-sex spouse.
Health and Welfare Plans, including Cafeteria Plans
ERISA does not now dictate that spouses must be offered coverage in a health plan, so there is no automatic impact on health plan terms governing spouses. But, if your health plan already grants some rights to spouses and defines a spouse in a way that might capture same-sex partners after this decision, then you need to consider what changes you will make in your plan's administration. Further, if your health plan allowed coverage of same-sex partners before, then how you tax the benefit to the employee in a same sex marriage will be changing.
- Taxation – coverage of same-sex spouses will no longer result in imputed income to the employee for the value of the spouse's coverage; same-sex spouses may now be covered on a pre-tax basis.
- COBRA rights – the COBRA qualifying events that lead to loss of coverage for a spouse (divorce, employee loss of employment, or death of the employee) and result in continuation coverage rights will now apply to same-sex spouses.
- Change in Status Events – mid-year election changes under a cafeteria plan that can be made for certain change in status events relating to a spouse will now apply to same-sex spouses; in all likelihood, a mid-year change will also be allowed for an employee to elect coverage for a same-sex spouse that was formerly not allowed.
- FSAs, HSAs, and HRAs – tax-free reimbursement for qualified medical expenses under flexible spending arrangements, health savings accounts, and health reimbursement accounts will now be available for expenses incurred by a same-sex spouse.
- HIPAA Special Enrollment Rights – A same-sex spouse now has a right to HIPAA special immediate enrollment under the employee's health plan, including where the same-sex spouse has lost coverage under another plan.
Fringe Benefits – Many employer-provided fringe benefits can be provided to an employee and spouse at no tax cost, or with a tax exclusion that depends on the income of both the employee and the spouse. For example, employee discounts and non-additional cost services may be extended to recognized same sex spouses without Federal tax consequences now, the amount of dependent care expenses that can be paid without tax depends on lower earned income of employee and a spouse, tuition reimbursement and adoption assistance plans often benefit spouses. All fringe benefits should be examined for spousal treatment, including tax treatment of benefits provided to same-sex spouses.
Family and Medical Leave Act – FMLA rules will now apply to situations involving a same-sex spouse, and employers must allow a qualified employee to take FMLA leave to care for a same-sex spouse.