Yesterday, the U.S. Supreme Court held in U.S. v. Windsor that Section 3 of the federal Defense of Marriage Act of 1996 (“DOMA”) is unconstitutional based on federal due process and equal protection principles. Section 3 of DOMA provides that, for all federal law purposes, the term “spouse” refers only to a person of the opposite sex who is a husband or wife. As a result, Section 3 of DOMA denied same-sex couples married under state law numerous federal rights and responsibilities, including under employer-sponsored benefit plans subject to federal law, principally ERISA1. The Windsor decision will generally become effective on July 23, 2013 (i.e., 25 days after the date of the decision). This client alert focuses on the practical implications of the Court’s ruling in Windsor for employee benefit plans.
What The Ruling Does Not DoAs an initial matter, it is important to understand the limitations of the Court’s decision.
States Retain AuthorityThe Court’s decision does not address whether same-sex couples have the right to marry under the U.S. Constitution. Accordingly, federal law continues to defer to state-by-state determinations as to whether same-sex couples should be afforded the opportunity to marry. Notably, Windsor did not involve a challenge to Section 2 of DOMA which permits a state to decline to recognize the same-sex marriage granted by any other state. Thirteen states (CA, CT, DE, IA, MA, MD, ME, MN, NH, NY, RI, VT and WA)2 and the District of Columbia now permit same-sex marriage. Four other states (CO, HI, IL and NJ) permit civil unions and several other states (and localities) recognize some form of domestic partnership.
Civil UnionsWhile states that permit civil unions intend to afford such unions the same, or substantially similar, rights and responsibilities as marriage under state law, the Court’s opinion does not discuss whether civil union partners are “spouses” for federal law purposes.
Conflicting State LawsIn the event that a conflict between the marriage laws of two states, the Court’s decision does not provide any guidance as to which state’s marriage law should control for various federal law determinations, particularly in the employee benefit plan context. For example, as described in more detail below, retirement plans are required to provide certain protections to spouses under federal law. However, it is unclear whether a same-sex spouse will be treated as a spouse when an employee marries his or her same-sex partner in a state that permits such marriage but resides in, and is employed by an employer in, a state that does not recognize same-sex marriage. Although more same-sex couples would benefit from the Windsor decision if the law of the state in which the marriage took place governs, federal tax law sometimes looks to the law in which a couple resides to determine whether they are married.
Retroactivity The Court’s ruling does not address whether, as a result of DOMA Section 3 arguably having been unconstitutional since its inception, individuals in same-sex marriages may have certain retroactive rights under federal law. For example, same-sex married couples may be able to file amended tax returns for open tax years to request refunds based on tax advantages previously denied to them as a result of DOMA.
We expect that the Department of Labor and the Internal Revenue Service will need to issue guidance in the near term to address the questions that will arise from the Windsor opinion, including many of the items described above.
Key ConsiderationsThe following is a brief summary of the key considerations for employee benefit plans following the Court’s holding that Section 3 of DOMA Section 3 is unconstitutional.
Health and Welfare PlansA same-sex spouse of an employee will be treated as a qualified tax dependent under the Code3. This change will simplify administration of health and welfare plans in the following ways:
Health Plans Premiums. Premiums payable by an employee with respect to his or her same-sex spouse (and such spouse’s children (i.e., the employee’s stepchildren) who are “qualifying children”) may be made on a pre-tax basis for medical, dental and vision coverage through an employer’s cafeteria plan.
Note: To be a “qualifying child” of an employee, the same-sex spouse’s child must (i) be under age 27 as of the end of the taxable year, (ii) generally live with the employee more than half the taxable year, and (iii) not provide more than half of his or her own support for the year.
Health Care Flexible Spending Account (“FSA”). An employee may be reimbursed on a pre-tax basis from a health care FSA for eligible medical care expenses incurred on behalf of an employee’s same-sex spouse (and such spouse’s children who are qualifying children of the employee).
Dependent Care FSA. An employee may be reimbursed on a pre-tax basis from a dependent care FSA for eligible expenses incurred for the care of (i) his or her disabled same-sex spouse who lives with the employee more than half the year, and (ii) a child of his or her same-sex spouse who is a qualifying child of the employee under age 13.
Gross-Ups. Some employers provide employees with gross-up payments to cover the additional taxes incurred by the employee as a result of his or her same-sex spouse’s coverage being treated as taxable under DOMA. Given that opposite-sex and same-sex spouses will now be treated the same for tax purposes, these gross-up payments are no longer needed.
Domestic Partner Benefits. If same-sex marriage is legal in the states where an employer operates and its employees reside, then an employer may determine that the need to offer domestic partner benefits no longer exists.
Retirement Plans The following protections currently available to opposite-sex spouses under tax-qualified retirement plans will now be extended to same-sex spouses:
Default Beneficiary. A same-sex spouse will be an employee’s legally-required beneficiary under a retirement plan, unless the spouse consents in writing to the employee’s designation of another beneficiary.
Qualified Joint and Survivor Annuity (“QJSA”). Under a defined benefit plan and certain other plans, same-sex spouse will entitled to receive a spousal survivor annuity upon the employee’s death after retirement, unless an alternative optional form of benefit is elected with the spouse’s written consent.
Qualified Pre-Retirement Survivor Annuity (“QPSA”). Under a defined benefit plan and certain other plans, a same-sex spouse will entitled to receive a 50% survivor under a retirement plan in the event the employee dies before benefit commencement.
Qualified Domestic Relations Orders (“QDRO”). A same-sex spouse will be permitted to seek a QDRO order in connection with his or her divorce from an employee.
Required Minimum Distributions (“RMDs”). The special and more favorable rules applicable to “spouse beneficiaries” under the rules for RMDs will now be extended to same-sex spouses allowing such spouses to defer income over longer periods of time.
Rollovers. A same-sex spouse will be entitled to roll over an eligible rollover distribution from a retirement plan into an IRA, without it being treated as an inherited IRA, or to another employer plan.
Summary This summary does not contain an exhaustive discussion of the Windsor case or its implications for employee benefit plans. Employers should carefully review their plan documents and administrative practices for their employee benefit plans to determine the required and optional changes needed in response to the Windsor decision.
The Employee Retirement Income Security Act of 1974, as amended.
The Court’s opinion in
Hollingsworth v. Perry
, a companion case to
decided on the same day, had the effect of reinstating same-sex marriage in California by dismissing an appeal on procedural grounds (i.e., legal standing). Accordingly, same-sex marriage will once again be permitted in California after the Ninth Circuit lifts its stay in response to the
decision, which is generally expected on or before July 23, 2013. Same-sex couples will be permitted to obtain marriage licenses in Delaware beginning on July 1, 2013 and in Rhode Island and Minnesota on August 1, 2013.
The Internal Revenue Code of 1986, as amended.
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