Backgound: The U.S. Court of Appeals for the First Circuit recently ruled that Section 3 of the Defense of Marriage Act (“DOMA”)1 is unconstitutional (Massachusetts v. U.S. Dep’t of Health & Human Servs., No. 10-2204 (1st Cir. May 31, 2012). This provision defines “marriage” for purposes of federal laws as follows: “The word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.”2 This means that federal laws do not recognize marriages of same sex spouses even if valid under a state’s law. This definition impacts more than 1,000 federal laws.
The U.S. Department of Justice previously announced that it would not defend this law in the courts and a group formed by members of the U.S. House of Representatives, known as the “Bipartisan Legal Advisory Group” (“BLAG”) stepped in to take that role. BLAG filed a Petition for a Writ of Certiorari to the Supreme Court seeking review and reversal of the decision. The Solicitor General filed a Cross-Petition in the case and also filed a Petition for Cert. in Golinski v. OPM, a case involving the same issue pending before the Ninth Circuit, before that Circuit had ruled. The lower court in Golinski had ruled that DOMA was unconstitutional. The Solicitor urged the Supreme Court to grant certiorari and the odds are very good that the Court will grant certiorari in one or both cases.
We provide you with an early “heads up” about these cases because a Supreme Court decision is likely to have significant and broad implications. Plan sponsors with employees in same-gender spousal relationships will likely feel an impact. Below are a few illustrative examples of potential effects any Supreme Court decision in these or other future cases may have on the administration of employer-sponsored benefit plans.
As a preliminary matter, we address the question of how employers are affected when an employee who is party to a same sex marriage conducted in a state where such marriages are recognized is relocated to a state in which the law does not recognize same sex marriage. DOMA expressly permits each state to decide whether it will recognize same sex marriages lawfully performed in other states. Currently, therefore, it seems that the appropriate response is that employers must deal with the employee and the spouse on the basis of the legal status of same sex marriage in the jurisdiction in which the employee currently is employed. (We note that the question concerning where an employee is employed can be complicated, as are issues relating to employment in one state and residency in another, and is beyond the scope of this article.)
Possible Impact of DOMA Invalidation:
- Interplay With Social Security Benefits
DOMA denies federal benefits that would otherwise accompany a marriage between individuals of the same sex, even if those individuals are married and residing in states that recognize such marriages. For example, same-sex couples may not collect Social Security survivor benefits if one spouse predeceases the other. Also, since certain pension plan formulas include a Social Security offset or are otherwise coordinated or integrated with Social Security benefits, a ruling that DOMA is unconstitutional could affect these pension plan designs. With DOMA out of the picture, those plans can treat same sex spouses in legally recognized marital relationships in the same manner as opposite gender spouses as both sets of spouses would be eligible to receive the Social Security benefits barred to same sex spouses under DOMA.
- Retirement Benefits
- Certain pension plans provide survivor benefits for a surviving spouse (qualified joint and survivor annuities). DOMA prevents same-gender spouses from receiving the protections regarding qualified joint and survivor annuities in ERISA pension plans (although a plan could provide a non-qualified survivor annuity).
- Hardship distributions from 401(k) plans are permitted if events of financial hardship affect the participant or the participant’s spouse. DOMA excludes same-gender spouses from this protection because they cannot be recognized as a “spouse.”
- In sum, a decision affirming the ruling of the First Circuit will change (and, in some respects, simplify) the administration of providing benefits or other protections (e.g. spousal consent requirements) to same-gender spouses.
- Health and Welfare Benefits
- Many employers have extended medical coverage to same-sex spouses. But, under DOMA, the employer premium contributions made to a group health plan benefiting both a same-sex spouse and the dependent children of that spouse are not excludable from the employee’s federal income tax because the beneficiary is not recognized as a “spouse.” Presumably, if the employee legally adopts those children, DOMA is irrelevant regarding coverage of the children. Similarly, the employee may not make a pre-tax contribution under the employer’s Section 125 cafeteria plan for the premium the employee contributes for coverage for his or her same-sex spouse. This bar is equally applicable to HSAs, HRAs and FSAs which cannot be tax advantaged with respect to contributions applicable to health care expenditures for a same sex spouse.
- DOMA has led many employers to develop and administer ERISA welfare benefit programs on the premise that they are not required to offer spousal rights benefits to same-sex spouses, even if a marital relationship is recognized under applicable state law (ERISA, as well as DOMA, preempts state laws for these purposes). If DOMA is found to be unconstitutional, the law will revert to pre-DOMA status and state law will control spousal status and coverage issues, at least in connection with insured plans and, perhaps, with respect to self-funded plans. For example, if an employer offers a health benefit that covers spouses, a state law that recognizes same sex spousal relationships likely would be interpreted to require employers to provide coverage to all lawful spouses without regard to whether they are of the same gender as the employee.
- The nullification of DOMA might also have other consequences.
- An employer with employees in states that explicitly recognize same sex marriages, as well as states that explicitly prohibit the recognition of such marriages (particularly employers who fund benefits through insurance), could have practical difficulties treating same sex couples and their children uniformly in both sets of states.
- Self-funded employer plans might have an easier time creating plans that are not affected by state laws concerning same sex spousal relationships because ERISA’s preemption provisions might shield them against the interference with their benefit plan designs such laws may cause. This is because the only state laws that are permitted to affect the coverage and administration of ERISA plans are laws that “regulate the business of insurance.” As self-funded plans do not involve insurance, they would not be subject to any state law that would prohibit insurance policies from treating same sex relationships as if they were lawful marital relationships.
NOTE: The Supreme Court could rule that all discrimination against same sex marital relationships is unconstitutional in the same manner as discrimination on the basis of race is proscribed. In that event, all plans, whether self-insured or insured would have to treat same sex marital relationships in the same manner as they treat opposite sex marital relationships. We believe, however, that the Supreme Court will address this issue carefully and in incremental steps, and is likely to limit its ruling to whether DOMA itself is constitutional, not whether any form of discrimination regarding same sex marriages is prohibited.
Many states, however, have been targeting self-funded plans to bring them under state control by such means as, for example, asserting regulatory control because the states argue that the stop-loss arrangements self-funded plans have created are deemed to convert such plans to insured plan status. (See, Modeling and Analysis of Stop- Loss Insurance for Use in NAIC Model Act, Milliman, May 24, 2012, documenting effort of state insurance commissioners to regulate self-funded plans; California S.B. 2114, approved by the Assembly on 8/20/12, (regulating stop-loss insurance required to be purchased by self-funded plans)). State corporate and individual income tax laws also could play an influential role with respect to coverage of same sex spouses and the children of such relationships much in the same manner as federal law does under DOMA. For example, state corporate income tax laws might not allow employers to deduct premium contributions made for coverage of an employee’s same sex spouse and for the children of a same sex spouse.
- Various enrollment provisions under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) pertaining to married couples are not available to participants in same-sex marriages because of DOMA. Currently, employers that desire to treat all marital relationships similarly must negotiate or develop complex arrangements that generally are a higher cost undertaking. If the Supreme Court finds that DOMA is not constitutional, this complexity may be avoided in states that recognize same-sex marital relationships. In the absence of DOMA, as previously explained in “2”, self-funded plans could treat same sex marital relationships equally with opposite sex relationships even in states with laws that same sex relationships are not marital relationships.3
- FMLA & COBRA Benefits
Under DOMA, private employers are not required to provide benefits under the Family and Medical Leave Act (“FMLA”) and the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) to spouses in same-sex marriages. This would change if the Supreme Court were to sustain the ruling that DOMA is unconstitutional. Because DOMA prohibits the recognition of same sex relationships as marital relationships for federal law purposes, an employee is not entitled to take time off to care for a same sex partner, even if they are lawfully married under applicable state law, because the partner does not qualify as a spouse under FMLA. The same would be true of that spouse’s children. With respect to COBRA, since a same sex spouse is not entitled to be covered under an insured benefit plan that includes spousal coverage, that spouse would not be entitled to a COBRA notice when that coverage terminates.
- Benefits in States Recognizing Same-Sex Marriages
If DOMA is found unconstitutional, the greatest impact on employers will be in states that recognize same-sex marriages. The reason, as noted earlier, is that the federal laws that govern benefit plans, such as ERISA, HIPAA, and COBRA, as well as the Internal Revenue Code, no longer will treat same-sex relationships in those states as other than ordinary marital relationships. At present, this involves relatively few states. Whether more states will recognize same-sex marriages is uncertain, but this possibility cannot be discounted. Thus, if DOMA is invalidated, significant issues (discussed above) arise as to the treatment of same sex marriages under both insured and self-insured plans (see below).
- What If The Court Sustains The Decisions That Invalidate Section 3?
The ruling that DOMA is unconstitutional will not of itself require that employers provide coverage to same gender spouses of employees. Employers whose plans do not offer spousal coverage will not be required to do so. Employers who do provide spousal coverage through insurance in states that recognize same sex marriages likely will not be able to purchase coverage that excludes same gender spouses. And employers with plans that cover domestic partners that includes same sex marriages may have to revise the tax treatment of those who are lawfully married under a state’s laws. The projection is more difficult with respect to self-funded employers located in such states. In those states, employees who are lawfully married to same sex spouses arguably could raise state law claims that an employer’s failure to provide coverage to their spouse constitutes unlawful discrimination. Depending upon the provisions of the state law and the grounds of the Supreme Court’s ruling, among other factors, such a claim might be sustained.
In states that enact laws that expressly rule that same sex marriages are not cognizable as marital relationships, the impact of the Court’s ruling may depend upon whether the Court rules that the states are free to decide for themselves whether to recognize same gender marriages, and that the holding is applicable only to the federal government. In this circumstance, employers located in those jurisdictions likely would be able to offer insured spousal coverage only to opposite gender marital relationships. Employers who sponsor self-funded plans would be indirectly affected; of course, by state corporate income tax provisions that preclude the taking of deductions for contributions made on behalf same sex spouses or their children. If, however, the Court’s ruling rests on the finding that the refusal to treat same sex marriages as lawful is an unconstitutional discrimination, challenges to such states’ laws can be expected.
We will keep you apprised as this issue moves through the courts.