Now that the United States Supreme Court has announced that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional, a host of federal tax and employee benefit issues, among others, arise. How the repeal affects some of these is clear, but the resolution of others may not be possible absent guidance from the relevant agencies. Here are a few of the big ticket items that will affect most employers.
GROUP HEALTH PLAN ISSUES
Under federal law prior to the repeal of Section 3 of DOMA, the trilogy of federal income tax consequences to an employee participating in an employer sponsored group health plan with domestic partner or same-sex spouse coverage generally were: (1) imputed income to the employee equal to the value of the coverage for the same-sex spouse or domestic partner; (2) the prohibition on the use of pre-tax employee contributions to pay for the incremental cost of same-sex spouse or domestic partner coverage under the group health plan; and (3) a ban on the reimbursement of health expenses incurred by the same-sex spouse or domestic partner under various tax-favored vehicles (including health care flexible spending accounts, health reimbursement arrangements and health savings accounts). Now that same-sex marriage is recognized under federal law, these consequences no longer apply. And so, for example, employers can stop imputing income for federal income tax purposes.
It is not clear how the repeal of Section 3 of DOMA will be applied on a retroactive basis, however, and we anticipate guidance from the Internal Revenue Service will be forthcoming. For example, can income imputed for federal income tax purposes with respect to coverage provided earlier this year be reversed? Or can employees change their pre-tax premium payment elections mid-year in the absence of an otherwise valid “change in status” event? (That said, it seems clear to us that at the next open enrollment, an employee with a same-sex spouse will now be permitted to use pre-tax dollars to pay for his or her share of the entire cost of coverage.) And can medical expenses incurred by a same-sex spouse prior to the Supreme Court’s decision be reimbursed (on a tax-favored basis) from any of the vehicles mentioned? Pending guidance, employers should tread carefully before implementing some of these changes.
RETIREMENT PLAN ISSUES
Going forward, same-sex spouses should be treated in the same way as opposite sex spouses for qualified retirement plan purposes. For example, consent of the same-sex spouse will now be required in order to designate a beneficiary other than the spouse under most qualified plans. Similarly, for plans with a default qualified joint and survivor annuity (QJSA) form of payment, such as defined benefit plans, same-sex spousal consent will now be required to elect an alternative distribution form. And qualified plans will be permitted to transfer benefits to a former same-sex spouse under a qualified domestic relations order (QDRO). Again, the extent to which DOMA applies retroactively remains to be seen, and the validity of preexisting beneficiary designations for someone other than the same-sex spouse, as well as prior distribution elections other than in a QJSA form, will need to be confirmed by future guidance.
A MYRIAD OF OTHER ISSUES
Employees with same-sex spouses may want to change their payroll tax withholding elections, and some may even ask about refund claims with respect to the additional income included for coverage of a same-sex spouse prior to the Supreme Court’s decision. Many same-sex couples have already filed so-called “protective” federal refund claims to prevent them from being barred by the statute of limitations. Employers may also now consider filing refund claims with respect to additional employment taxes paid on imputed income (and the after-tax payment of the employee’s share of the incremental cost of coverage under a cafeteria plan).
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As a reminder, the Supreme Court decision does not affect the federal tax treatment of domestic partner benefits and does not affect the state income tax treatment of domestic partner or same-sex spousal benefits. The decision also does not resolve how to administer benefits of same-sex couples who live in states that do not recognize same-sex marriage, but were married in a state that does.