On June 26, 2013, the Supreme Court issued its decision in United States v. Windsor,1 holding that Section 3 of the Defense of Marriage Act (also known as DOMA) is unconstitutional. As a consequence, a same-sex marriage must be recognized under federal law if such marriage is recognized by the state in which the couple resides.
The Windsor decision has a significant impact on employers, particularly with respect to employer-sponsored benefit plans. As employers await guidance from the Internal Revenue Service (IRS), the following are answers to the questions we’re most often asked about the decision:
Which same-sex couples need to be provided benefits?
Same-sex spouses living in a state that recognizes same-sex marriage should generally be provided the same benefits that are provided to spouses of the opposite sex. It is unclear, however, whether an employer must recognize a same-sex marriage that was legally entered into in another state if the state in which the employee lives does not recognize that marriage.
Some employers are electing to provide benefits to all same-sex spouses regardless of state of residence; others plan to provide benefits only to same-sex spouses living in states that recognize same-sex marriage. Many others, though, are waiting for guidance from the IRS regarding this issue.
What are the tax implications of the Windsor decision?
Same-sex spouses living in states that recognize same-sex marriage should be able to file federal returns jointly. In addition, health plans providing coverage to these same-sex spouses no longer need to impute the value of employer-paid coverage as income to the applicable employees. Employees will also be permitted to pay health plan premiums for these same-sex spouses using pre-tax dollars through a cafeteria plan, although the effective date for such pre-tax treatment is not yet clear.
As mentioned above, further guidance will be required to determine whether these benefits may also extend to same-sex spouses living in states that do not recognize same-sex marriage.
How does the Windsor decision affect benefits provided under employer-sponsored retirement plans?
A number of protections and benefits under retirement plans will need to be extended to same-sex spouses living in states that recognize same-sex marriage, including the following:
- A surviving same-sex spouse must now receive the protection of a qualified joint and survivor annuity (QJSA) and/or a qualified pre-retirement survivor annuity (QPSA) under defined benefit plans and certain defined contribution plans, unless the spouse agrees to waive such a right.
- In cases where spousal consent was previously required prior to distribution (e.g., for a beneficiary change, for certain loans or for QJSA/QPSA waivers), consent must now be obtained from same-sex spouses.
- Plans will be required to divide and allocate retirement benefits in accordance with qualified domestic relations orders that apply to same-sex spouses.
- Calculations and timing of required minimum distributions may now take into account a same-sex spouse’s life expectancy.
- Same-sex spousal beneficiaries must now be permitted to rollover retirement benefits into an IRA or an employer plan account rather than being limited to an inherited IRA.
- A plan that permits hardship distributions for medical care, tuition or burial/funeral expenses for an employee’s spouse must now permit such distributions for expenses relating to an employee’s same-sex spouse.
How does the Windsor decision affect benefits provided under employer-sponsored health plans?
In addition to the tax implications mentioned above with respect to health plans, the Windsor decision will have other effects on health plans for spouses living in states that recognize same-sex marriage, including the following:
- A plan that provides coverage for spouses should generally extend coverage to same-sex spouses.
- Special enrollment rights that previously applied to spouses (e.g., special enrollment upon marriage) must now be applied to same-sex spouses.
- Some employers are extending immediate special enrollment rights (including the ability to make an election to pay premiums pre-tax under an employer cafeteria plan) to employees with same-sex spouses. Still others are waiting for guidance from the IRS prior to doing so.
- If employee spouses and dependents are eligible for COBRA continuation coverage under a plan, COBRA coverage must now be provided to same-sex spouses and the dependents of same-sex spouses.
It is important to note that federal law does not require that health plan benefits be extended to spouses. Some employers may, as a result, choose to extend coverage only to spouses of the opposite sex or elect not to extend health plan coverage to any spouses. An employer that elects to extend coverage only to spouses of the opposite sex leaves itself open to charges of violation of non-discrimination laws and should seek legal guidance on this approach. Expect to see clarification and litigation on this front in the coming years.
What should an employer be doing now?
We recommend that employers use this time to review their various benefit plans and determine what changes may need to be made (e.g., to the definition of “spouse”) to comply with the Windsor decision. These changes do not necessarily need to be made immediately. Most practitioners anticipate that the IRS will provide some transitional relief giving plan sponsors extra time to adopt required plan amendments. The IRS has issued comparable relief following other Supreme Court decisions affecting retirement plans (for example, following the decision in Central Laborers’ Pension Fund v. Heinz2). Employers may also encourage employees to review their beneficiary designations under qualified retirement plans.
For plans that provide health plan coverage to same-sex spouses, employers may stop imputing into income the value of any employer-paid coverage for employees living in states that recognize same-sex marriage. Employers should also consider whether they wish to offer same-sex couples a special enrollment opportunity in wake of the Windsor decision, though we recommend waiting until the IRS has issued guidance on whether a mid-year election is permissible under these circumstances.
When will guidance be issued?
The IRS has promised to “move swiftly” to propose guidance on how Windsor will be implemented.