On June 26, 2013, the U.S. Supreme Court struck down Section 3 of the Defense of Marriage Act ("DOMA") in Windsor v. United States (decision available here). Section 3 of DOMA provided that, for the purposes of federal law, "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." The Windsor decision affects more than 1,000 federal statutes and regulations, including several provisions of the Internal Revenue Code, the Employee Retirement Income Security Act, and other federal laws that govern employee benefit plans. As a result, employers will need to consider how the Windsor decision affects their employee benefit plans.
The Windsor decision does not consider or affect Section 2 of DOMA (the "full faith and credit" provision), which provides that a state is not required to recognize same-sex marriages performed in another .1 It is unclear whether employers will be required to define "spouse" based on any particular standard, such as an employee’s state of residence or the state in which an employee’s marriage was performed.
Facts of the Case
Edith Windsor and Thea Spyer, a same-sex couple, were married in Canada in 2007 and resided in New York, which recognized their Canadian marriage. After Spyer’s death in 2009, the government denied Windsor the marital exemption from federal estate taxes because she was considered neither "married" nor a "spouse" under federal law since Section 3 of DOMA. Windsor filed a lawsuit to challenge Section 3 of DOMA and seek a refund of the additional taxes that she was required to pay as a result of the denial of the marital exemption. The case made its way up to the U.S. Supreme Court, which, in a 5-4 decision, determined that DOMA’s definitions of "marriage" and "spouse" were unconstitutional.
Impact on Employee Benefit Plans
All employee benefit plan eligibility provisions should be reviewed and, possibly, amended. For example, any employee benefit plan that refers specifically to DOMA’s definition of "marriage" or "spouse" may need to be amended. Summary plan descriptions, other benefit summaries, and administrative forms (e.g., beneficiary designation form) also may need to be revised. Below is a brief summary of several employee benefits provisions and operations that are impacted by the Windsor decision. (Note: The list is not intended to be exhaustive.)
Qualified Retirement Plans
- A same-sex spouse will be entitled to a pension plan’s qualified preretirement survivor annuity and qualified joint and survivor annuity unless the same-sex spouse waives such rights.
- A same-sex spouse will be the beneficiary of a 401(k) plan participant’s account unless the same-sex spouse consents to the designation of another individual as beneficiary.
- A same-sex spouse will be considered a spouse for purposes of the 401(k) plan safe harbor hardship distribution events. If a 401(k) plan requires spousal consent for a participant to receive a plan loan, consent may need to be obtained from the participant’s same-sex spouse.
- A same-sex spouse may rollover a distribution that the spouse receives as a beneficiary to his or her own IRA or retirement plan account (as opposed to being limited to a rollover to an inherited IRA).
- A same-sex spouse may be awarded retirement plan benefits by a qualified domestic relations order in connection with a separation, divorce and other domestic relations proceeding.
Health and Welfare Plans
- The value of employer-provided health and welfare plan coverage of a same-sex spouse (and a same-sex spouse’s children who now qualify as the employee’s stepchildren) no longer will be taxed as imputed income for federal tax purposes. This means that employers no longer will be required to pay additional Federal Insurance Contributions Act ("FICA") taxes on such imputed income. In addition, premiums for such coverage may be paid on a pre-tax basis for federal tax purposes.
- Eligible medical expenses incurred by a same-sex spouse (and a same-sex spouse’s children) may be reimbursed from a healthcare flexible spending account (FSA), health savings account (HSA), and health reimbursement account (HRA).
- A same-sex spouse will be considered a spouse for purposes of the change in status events and HIPAA special enrollment rules that allow mid-year cafeteria plan election changes.
- A same-sex spouse will have the rights of a spouse with respect to COBRA continuation coverage.
Employers should check with their benefits attorneys, third party administrators, insurers, other employee benefit service providers, and payroll vendors to confirm that they are making any necessary changes in administration and operation of plans.
The Windsor decision has left many unanswered questions on which we anticipate future guidance, including:
- How should an employer treat a same-sex couple who was legally married in a state that permits same-sex marriage, but resides or is employed in a state that does not recognize same-sex marriage?
- Does this decision only have a prospective effect, or does it also have retroactive effect (if so, how far back)? If the decision has retroactive effect, how does it affect beneficiary designations or distributions already made that would have required consent from a same-sex spouse?
- If the decision has retroactive effect, should claims be filed for refunds of FICA taxes paid by employers and employees on imputed income with respect to health and welfare plan coverage for married same-sex couples?
- Can an employer with an insured health plan in a state that does not require coverage for same-sex spouses or a self-insured health plan choose to provide coverage only to opposite-sex spouses?
- How will states that have a state law equivalent to DOMA or incorporate DOMA into state law by reference react to the decision?
Employers should keep an eye out for future guidance. The Internal Revenue Service has announced that it is working with the Department of Treasury and the Department of Justice to provide guidance with respect to the Windsor decision.