This is the second of a seven-part series describing "Hot Employment Topics for 2014." Part II focuses upon "The Aftermath of the Demise of the Defense of Marriage Act."
The United States Supreme Court in 2013 struck down the federal statute known as the Defense of Marriage Act (United States v. Windsor), a federal statute that had excluded same-sex marriages from recognition under several other federal laws, including the Internal Revenue Code. In so doing, the Court determined that Ms. Windsor, a woman who had lawfully married another woman and then later was widowed, could not be barred from claiming the status of a spouse so as to avoid significant estate tax liability. The Court primarily based its decision on the protection of individual liberty and equal protection embedded in the Fifth Amendment, as well as principles of federalism, holding that the Federal Government could not take away rights to which States deemed certain individuals entitled. The Court reasoned that "[t]he federal statute is invalid [because its] legitimate purpose overcomes the purpose and effect to disparage and to injure those whom the State, by its marriage laws, sought to protect in personhood and dignity." In striking down these portions of DOMA, the Court essentially held that the Federal Government must recognize same-sex marriages in the same way it recognizes heterosexual marriages.
The impact of the Windsor decision will be felt by employers nationwide, regardless of whether they are in States that recognize same-sex marriage. Specifically, many states that recognize same-sex marriage permit non-residents to marry. Thus, shortly after the Court issued the Windsor decision, the question arose regarding whether certain federal agencies (like the IRS) would look to a person's state of residence or state of celebration to determine his or her marital status for tax purposes.
In IRS Revenue Ruling 2013-17, the IRS concluded that same-sex couples lawfully married in a state that permits same-sex marriage would be recognized as married for tax purposes, regardless of the couple's state of residence. Thus, for example, if a same-sex couple is lawfully married in California or New York but resides in Texas (a state that does not recognize the marriage), that couple is still considered married by the IRS.
In deciding to look to the state of celebration to determine taxable marital status, the IRS relieves employers operating in more than one state of potentially significant burdens on employee benefit plans which would otherwise arise if the IRS looked to state of residence. The Revenue Ruling describes the potential administrative nightmare for employers that would result from a "state of residence" rule:
[If the IRS looked to a person's state of residence to determine marital status,] the need for and validity of spousal elections, consents, and notices could change each time an employee, former employee, or spouse moved to a state with different marriage recognition rules. To administer employee benefit plans, employers (or plan administrators) would need to inquire whether each employee receiving plan benefits was married and, if so, whether the employee's spouse was the same sex or opposite sex from the employee. In addition, the employers or plan administrators would need to continually track the state of domicile of all same-sex married employees and former employees and their spouses. Rules would also need to be developed by the Service and administered by employers and plan administrators to address the treatment of same-sex married couples comprised of individuals who reside in different states (a situation that is not relevant with respect to opposite-sex couples).
For all of these reasons, plan administration would grow increasingly complex and certain rules, such as those governing required distributions under section 401(a)(9), would become especially challenging. Administrators of employee benefit plans would have to be retrained, and systems reworked, to comply with an unprecedented and complex system that divides married employees according to their sexual orientation. In many cases, the tracking of employee and spouse domiciles would be less than perfectly accurate or timely and would result in errors or delays. These errors and delays would be costly to employers, and could require some plans to enter the Service's voluntary compliance programs or put benefits of all employees at risk.
Similarly, the Department of Labor also clarified that the term "spouse" for ERISA includes same-sex spouses. See Department of Labor Technical Release 2013-4.1
However, while the IRS' ruling post-Windsor will make an employer's administration of benefit plans less burdensome in the long run, there are some transitional difficulties. For example, pre-Windsor, when employers provided health benefits to same-sex domestic partners or same-sex spouses, DOMA prevented the employee from including his or her same-sex spouse on the plan on a pre-tax basis. Post-Windsor, the IRS determined that employees may file amended returns to retroactively seek to have their same-sex spouses' health coverage benefits, requiring an employer to potentially have to readjust certain deductions for affected years. Nonetheless, once the transitional period is complete, the administration of plans and tax withholdings for employers will be simplified, as employers will no longer have to differentiate between employees with same-sex spouses and those with opposite-sex spouses.
To read the previous edition of this e-Alert series, click the link below:
Part I: The New World of Disabilities Discrimination
1 "the terms 'spouse' and 'marriage' includes same sex individuals who are lawfully married in accordance with any state law. This also includes same sex individuals who were legally married in a state that recognizes such marriages, but currently live in a state that doesn't recognize same-sex marriage."