The Windsor Decision
On June 26, 2013, in a 5-4 decision, the United States Supreme Court issued a much anticipated ruling in United States v. Windsor,1 holding that Section 3 of the federal Defense of Marriage Act (“DOMA”) is unconstitutional on federalism and equal protection grounds. Under federal law, Section 3 of DOMA defined “marriage” as a legal union between one man and one woman as husband and wife, and “spouse” as a person of the opposite sex who is a husband or a wife. The Court’s majority reasoned that domestic relations, such as marriage, have traditionally been within the purview of the individual states and that in enacting Section 3 of DOMA, Congress exceeded its authority in contravention of federalism principles. Moreover, the Court reasoned that DOMA Section 3 “violates basic due process and equal protection principles applicable to the Federal Government” under the Fifth Amendment to the United States Constitution by seeking to injure a class of persons—lawfully married same-sex couples—that a state, through its enacted laws, had sought to protect. The Court emphasized that its holding is confined to “lawful marriages,” namely, same-sex marriages legally recognized by a state, and does not apply to civil unions or legal domestic partnerships. Therefore, after Windsor, the federal government cannot discriminate against same-sex marriages that are legal under state law. As of today, same-sex marriage is legally permitted in 13 states and the District of Columbia,2and in these jurisdictions, federal benefits must be doled out equally for same-sex and opposite-sex couples.
Unanswered Questions after Windsor
Many questions arise as a result of the Court’s landmark ruling in Windsor. To be sure, statutes, regulations, and rules that apply to federal benefits vary depending on whether the marriages are recognized based on where the couple resides (“place of domicile”) or where the marriage took place (“place of celebration”). This distinction is largely irrelevant when a same-sex couple resides in a state that recognizes same-sex marriages because under either classification (place of domicile or place of celebration), the couple’s marriage would be recognized. However, in the 37 states that do not recognize or expressly prohibit same-sex marriages, whether by statute, constitutional amendment, or both, a difficult conflict of law question arises: must the federal government provide benefits to same-sex couples lawfully married in one state but who currently reside in a state that does not recognize their same-sex marriage? Further, Windsor did not address the constitutionality of Section 2 of DOMA, which permits a state that does not recognize same-sex marriages to disregard a lawful same-sex marriage performed in another state that does recognize same-sex marriage. Accordingly, the conflict of law question could be rephrased this way: Should the federal government use the law of the place of domicile or of the place of celebration to determine whether a same-sex couple is lawfully married, thus entitled to federal benefits? The IRS and Treasury Department have issued guidance, as discussed in more detail below, as an initial step in this direction. However, until Congress, administrative agencies, or the courts provide additional guidance, this question will remain unanswered for many purposes, and employers, in many respects, will remain in limbo. In addition to discussing the IRS and Treasury guidance, this Alert also describes some of the other current guidance and decisions that have been issued since Windsor.
In the employee benefits context, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), generally preempts state laws that relate to an employee benefit plan or that conflict with ERISA. ERISA, however, does not define “spouse” or “marriage,” or identify which state’s law (the place of domicile or the place of celebration) would apply. Employers and plan sponsors are left to decide whether and how to define “spouse” in the context of their ERISA-governed employee benefit plans. This decision is even more complex for large, multi-state employers who must consider whether to define spouse or to administer the benefit plan in such a way as to extend (or to deny) benefits to employees who reside in a state that does not recognize their otherwise lawful same-sex marriage. Absent additional guidance from Congress, appropriate federal administrative agencies such as the IRS and the U.S. Department of Labor, or the courts, employers and plan sponsors, will have minimal certainty that their decisions (whether to define spouse or to administer the plan based on the laws of the place of domicile or the place of celebration) will ultimately be upheld or run afoul of any later issued guidance or court decision.
Recent Federal and Judicial Developments in Light of Windsor
Since the Windsor decision, the federal government and courts have provided limited guidance to address various unanswered questions in the employee benefits context. The guidance that has emerged has done little to answer these questions. For example, the Office of Personnel Management (the federal government’s human resources agency), announced in a July 17, 2013 memorandum to federal employees that, as to employees of the federal government, the choice of law question has been largely resolved: the law of the place of celebration will control. Accordingly, a lawfully married same-sex spouse of a federal employee is now eligible to participate in federal employee benefit programs. In contrast, the U.S. Department Labor recently released updated Family and Medical Leave Act (“FMLA”) guidance documents, which clarified that for FMLA purposes, the law of the place of domicile will control. Consequently, for FMLA purposes, a same-sex spouse is now covered if his or her marriage is recognized in the state in which the employee resides.
On August 29, 2013, the Treasury Department and the Internal Revenue Service issued a significant ruling, Revenue Ruling 2013-17, which concludes that legally married same-sex couples, regardless of where they live, will be treated as married for federal tax purposes. The Revenue Ruling applies prospectively as of September 16, 2013. Therefore, for the 2013 tax year, and for 2012 original income tax returns filed on or after September 16, 2013, legally married same-sex couples must now file either married filing jointly or separately. In addition, legally married same-sex couples may also choose to file an amended return for a refund claim for the 2010, 2011, and 2012 tax years. Moreover, the Revenue Ruling interprets the definitions of husband and wife for all purposes under the Internal Revenue Code, including all tax rules that apply to employee benefit plans; therefore, the Revenue Ruling also applies to any provisions in those plans imposed by the Internal Revenue Code. Nevertheless, aside from specific reference to health benefit and cafeteria plans, the Revenue Ruling provides that the IRS intends to issue further guidance on the retroactive application of Windsor to other employee benefits and employee benefit plans and arrangements, and that this guidance will address retroactive application, including addressing the time when plan amendments and other necessary corrections may be required.
While the IRS has provided significant guidance in this area, the Department of Labor and other federal agencies that have responsibility over numerous requirements and laws applicable to employee benefit plans, including ERISA, have yet to speak on this issue in the context of employee benefit plans. The Director of the Department of Labor’s Office of Health Plan Standards and Compliance Assistance has stated that these agencies are working on issuing additional guidance. Until those agencies provide needed guidance, uncertainty still exists in applying Windsor to a host of employee benefit issues.
Further, the Department of Health and Human Services (“HHS”) has issued a memorandum clarifying that beneficiaries in private Medicare plans are entitled to equal coverage to care in a nursing home where their
spouse lives. The memorandum clarified that the place of celebration controls and legally recognized married same-sex couples will receive this coverage.
Additionally, two recent court decisions have provided limited useful guidance. First, in Obergefell v. Kasich,3 an Ohio federal district court granted a temporary restraining order in favor of a same-sex couple to force Ohio, a state which bans same-sex marriage by both statute and constitutional amendment, to recognize their same-sex marriage that was lawfully performed in Maryland, a state which recognizes same-sex marriage. The same-sex couple sought to require the Ohio Registrar to accept a death certificate that recorded one of the same-sex partner’s status at death, which was imminent, as “married” and the other partner’s status as “surviving spouse.” The district court relied on the Supreme Court’s reasoning in Windsor to conclude that the same-sex couple would likely succeed on the merits of their challenge to Ohio’s ban on recognizing lawful same-sex marriages performed in another state. However, the district court’s application of Windsor’s precedent went beyond its holding, which was limited to lawful same-sex marriages legally recognized by the state, which Ohio did not recognize. Moreover, the trial court issued its decision in the context of a temporary restraining order, rather than a decision on the merits. Thus, the import and reach of this decision is unclear.
Second, in Cozen O’Connor, P.C. v. Tobits,4 another federal district court ruled that ERISA’s mandatory spousal benefit provisions extend to lawfully married same-sex spouses. Unlike the Ohio court that applied the law of the place of celebration to reach its decision, the Pennsylvania district court concluded that because the same-sex couple’s state of domicile (Illinois) recognized their marriage, which was legally performed in Canada, as lawful, then ERISA’s definition of “surviving spouse” must apply to both same-sex and opposite-sex spouses. Again, because a trial court issued this decision based on the specific facts presented, the import and reach of this decision is unclear.
Issues Facing Employers and Employee Benefit Plan Sponsors
In light of Windsor and the lack of substantive guidance from many of the governmental agencies with responsibility over employee benefit plans, employers and sponsors of employee benefit plans continue to face numerous issues, which include:
- How to determine which employees are in a lawful same-sex marriage, where the marriages were performed, and what proof, if any, to require of these marriages;
- Payroll process complexities, especially for large, multi-state employers, related to certain health and welfare benefits, which can only be provided tax-free to spouses and certain dependents of a lawful marriage for state income tax purposes;
- Determining the appropriate beneficiary of certain death benefits under ERISA’s mandatory spousal benefit provisions;
The proper administration of qualified and non-qualified retirement plans as well as health and welfare plans in the areas of:
- 401(k) hardship withdrawal rights,
- The rights of spouses and dependents of military personnel,
- The legality of domestic relations orders related to same-sex spouses,
- Joint and survivor annuity distribution rights under retirement plans, and
- The application of HIPAA continuation of coverage and special enrollment rules for same-sex spouses; and
- Whether state tax authorities will follow the federal tax rules.
As a practical matter, until additional guidance is issued, definitive answers to the multifarious open issues, beyond those addressed in Revenue Ruling 2013-17, remain elusive. In addition to tax and financial implications, employers must also consider the impact of their decisions on employee relations, such as: (i) whether to extend all or some benefits to lawfully married same-sex spouses who reside in jurisdictions that do not recognize their marriage; and (ii) whether to require proof of same-sex marriages if the employer does not require proof of opposite-sex marriages.
Nonetheless, employers and employee benefit plan sponsors may implement several best practices now, even before additional guidance is issued, such as:
- Consider both the legal and employee-relations implications of your Windsor-related decisions;
- Audit your employee benefit plan documents and summary plan descriptions to identify where and how “spouse” or similar terms are defined and if amendments are needed;
- Review and update benefit plan election forms, notices, and employee communications;
- Update payroll processes and confirm the proper tax treatment of salary reduction contributions and plan benefits in appropriate jurisdictions;
- Review your domestic partnership benefit provisions, if any, to determine their continued applicability in light of the Windsor decision;
- Identify employees who currently receive domestic partnership benefits and identify whether they are lawfully married to a same-sex spouse and where such marriage took place; and
For those employees identified as involved in a lawful same-sex marriage, consider:
- Updating their beneficiary designation forms, which would include obtaining consent of a same-sex spouse to name a person other than the same-sex spouse as beneficiary; and
- Providing employee benefits to same-sex spouses on a pre-tax basis.