On June 26, 2013, the United States Supreme Court, in United States v. Windsor, held that Section 3 of the Defense of Marriage Act (“DOMA”) is unconstitutional as a deprivation of the equal liberty of persons that is protected by the due process clause of the Fifth Amendment of the United States Constitution. Before it was struck down, Section 3 of DOMA had provided that for purposes of federal law, “marriage” means only a legal union between one man and one woman as husband and wife.
The Windsor ruling affects nearly every employee benefit plan. As a result of Windsor, the DOMA definition no longer applies. When Section 3 of DOMA was the law, employers could not provide many employee benefits and protections to same-sex spouses. The opposite is now true. Now that Section 3 of DOMA has been overturned, employers must extend most employee benefits and protections to legally married same-sex spouses.
In response to the Supreme Court’s ruling in Windsor, the Internal Revenue Service (the “IRS”), the Department of Treasury (“Treasury”) and the Department of Labor (the “DOL”) have released new guidance on the treatment of same-sex spouses. This guidance provides direction on some of the issues employers are facing in the wake of the Supreme Court’s ruling.
IRS and Treasury Ruling for Purposes of Federal Tax Law and Employee Benefits
On August 30, 2013, in Revenue Ruling 2013-17, the IRS and Treasury ruled that same-sex married couples will be treated as married for all federal tax purposes as long as they were married in a jurisdiction that recognizes same-sex marriages, which is known as a “state of celebration” standard.[1] The IRS supplemented this ruling by releasing Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law, which provides that the terms “spouse,” “husband and wife,” “husband” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law,[2] and the term “marriage” includes such a marriage between individuals of the same sex. This means lawfully married same-sex spouses will be treated the same as opposite-sex spouses with respect to federal mandates that apply to employee benefit plans.
The guidance also provides that these terms do “not include individuals who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as marriage under the laws of that state.”
The guidance is effective starting September 16, 2013, and will apply prospectively. The IRS has indicated that it will publish further guidance on any retroactive application of the Supreme Court’s opinion in Windsor to employee benefit plans. The IRS anticipates that “future guidance will provide sufficient time for plan amendments and any necessary corrections so that plans and benefits will retain favorable tax treatment for which they otherwise qualify.”
Required Changes to Qualified Retirement Plans
In order to maintain their qualified tax status, retirement plans are required to offer several spousal benefits and protections. Based on Windsor and the IRS guidance discussed above, employers are now required to offer certain benefits and protections to same-sex spouses, such as:
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defined benefit pension plans must offer qualified joint and survivor annuities (“QJSAs”) and qualified pre-retirement survivor annuities (“QPSAs”) to same-sex spouses;
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qualified plans must require same-sex spouses to consent to beneficiary designations in favor of anyone other than the same-sex spouse;
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qualified plans must honor qualified domestic relations orders (“QDROs”) in favor of same-sex spouses; and
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qualified plans must treat same-sex spouses as spouses for purposes of the required minimum distribution provisions.
The application of these protections to same-sex spouses can have some interesting results. For example, any beneficiary designation in favor of someone other than a participant’s same-sex spouse is now invalid and, by default, the beneficiary will be the same-sex spouse. Same-sex married employees who intend a different result must complete a new beneficiary designation form and obtain spousal consent, the same way that opposite-sex couples must. Another interesting result is that QDROs in favor of same-sex spouses that previously could not be honored are likely valid and should be reconsidered.
Health and Welfare Plans
While many spousal protections are federally mandated, there is no federal law that requires employers to offer health or welfare benefits to spouses. This leaves open the possibility that some employers may continue to distinguish between same-sex and opposite-sex couples. For example, an employer could design its health plan to only offer coverage to opposite-sex spouses and not same-sex spouses.
Most employers will probably conclude, for administrative reasons, that it is easier to treat all employees and spouses the same rather than operate a plan with two separate benefit schemes. One reason to do so is that many states and cities have laws that prohibit employers from discriminating based on sexual orientation, gender identity or marital status. There are arguments that such anti-discrimination laws are preempted by the Employee Retirement Income Security Act of 1974, as amended, but preemption can be hard to predict. Providing uniform benefits to all employees obviates the need to make such arguments.
Based on Windsor and the IRS guidance discussed above, employers who offer health coverage to same-sex spouses would additionally have to provide certain benefits and protections to same-sex spouses, such as:
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COBRA coverage upon the occurrence of a qualifying event (such as divorce or the employee’s termination of employment);
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special enrollment rights when a participant marries a same-sex spouse; and
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favorable tax treatment of benefits, at least on federal basis.[3]
DOL Guidance on the Family Medical Leave Act
The DOL has updated guidance on the Family and Medical Leave Act (“FMLA”) to include same-sex spouses in the definition of spouse as well as remove references to DOMA. FMLA requires covered employers to allow, among other things, eligible employees to take unpaid, job-protected leave from their employment to care for a sick spouse. Prior to Windsor, employers were not required under FMLA to grant an employee leave to care for his or her same-sex spouse. Now, as a result of Windsor, lawfully married same-sex couples will be treated the same as opposite-sex spouses for purposes of FMLA.
However, in order to be eligible for FMLA leave to care for a sick spouse, the current guidance requires employees to reside in a state that legally recognizes their marriage, whether same-sex or opposite-sex. This means that married same-sex couples who live in a state that recognizes same-sex marriage will be eligible for FMLA leave, but married same-sex couples who reside in a state that does not recognize same-sex marriage will not be legally entitled to FMLA leave. This is known as a “state of residency” standard. Under the state of residency standard, it is the state in which the employee resides that controls whether the employee’s significant other is a “spouse” for purposes of the FMLA.
Although the DOL has clarified that the state of residency standard applies for purposes of FMLA, a comment by Labor Secretary Thomas E. Perez that this revision of the DOL guidance is only “one of many steps the Department will be taking over the coming months to implement the Supreme Court’s decision” as well as the IRS’s recent decision to use a state of celebration standard for federal tax purposes, as discussed above, lead many to believe that status as a “spouse” for purposes of FMLA will ultimately be based on a state of celebration standard as well. However, for the time being, employers are only required to offer FMLA leave to employees to care for their same-sex spouses if those employees reside in a state that recognizes same-sex marriage.
Many employers may decide to grant 12 weeks of unpaid, job-protected leave, similar to FMLA leave, to all same-sex spouses, regardless of their state of residency. Employers that take this approach, however, must understand that if leave is granted to same-sex spouses residing in states that do not recognize same-sex marriage, that leave cannot be counted against the 12-week leave the employee may be entitled to under FMLA. For example, if an employer grants leave to an employee who lives in a state that does not recognize same-sex marriage to take care of a same-sex spouse, the employee would still be entitled to take the full 12 weeks of FMLA leave to care for his or her child in the same year. This approach may have the effect of giving better benefits to same-sex spouses than are provided to opposite-sex spouses.
It currently appears that employees residing in California, Connecticut, Delaware, Iowa, Massachusetts, Maryland, Maine, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington and the District of Columbia must be granted FMLA leave to care for a same-sex spouse. The same is also probably true for employees residing in New Mexico.[4] At this time, employees residing in other states (i.e., states that do not recognize same-sex marriage) are not legally entitled to FMLA leave to care for a same-sex spouse. Employers that have employees in states that do not recognize same-sex marriage should monitor developments in the law as many challenges are being brought against state bans on same-sex marriage in light of Windsor.
Action Items
Although we expect the regulators to issue additional guidance on these issues, employers should start moving forward with their compliance efforts. For example, with Revenue Ruling 2013-17 taking effect September 16, 2013, employers should, not later than such date, start allowing legally married same-sex spouses, regardless of where they reside, to pay for health care premiums on a pre-tax basis and stop imputing federal income tax to same-sex spouses for the employer-paid portion of the health care premium.
Employers might also start amending plans, summary plan descriptions and employee handbooks to reflect the recent guidance.
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