Same-Sex Marriage Cases: Are Your Benefit Plans Prepared?

by Davis Wright Tremaine LLP
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News articles, social media, protests, and lunchroom conversation were all dedicated to the two cases before the U.S. Supreme Court this week. Hollingsworth v. Perry and Windsor v. United States could potentially transform the treatment of same-sex married couples in the United States. The Supreme Court’s decision is expected in late June.

In this advisory we summarize the cases and the issues that sponsors of employee benefit plans should be considering now in preparation for the decision. If the Court determines that the issues before it, namely Proposition 8 (Prop 8) and Section 3 of the Defense of Marriage Act (DOMA), are constitutional, very little would change for employee benefit plans. However, if the Court affirms either case, employers will need to be prepared because a ruling striking down DOMA could require plans to promptly cover same-sex spouses.

For a general discussion of domestic partner and same-sex marriage issues in benefit plans, refer to our previous advisory and our webinar.

The cases
On March 26 and 27, the U.S. Supreme Court heard oral arguments:

  • At issue in Windsor, was whether Section 3 of DOMA violates the U.S. Constitution’s Fifth Amendment guarantee of equal protection of the law. Section 3 provides that the word "marriage," as used in any federal law or regulation, means only a union of a man and a woman. In Windsor, the plaintiff, a New York resident, sued the federal government when she was required to pay an estate tax upon her same-sex spouse's death, even though New York recognized the marriage as valid. She was required to pay the estate tax because DOMA limits the tax-free transfer of property at death to surviving spouses of the opposite sex. If the Court affirms the 2nd Circuit Court of Appeals’ finding that Section 3 of DOMA is unconstitutional, federal rights and mandates that apply to opposite-sex spouses would be extended to same-sex spouses.
  • At issue in Perry, was Prop 8, a 2008 California ballot measure that restricted marriage to one man and one woman after the California Supreme Court had previously recognized the right of same-sex couples to marry. Kristin Perry and Sandy Stier, a same-sex couple of 13 years with four children, challenged the constitutionality of Prop 8, arguing that it denies them the equal protection of the law promised by the U.S. Constitution. On the other side of the argument, sponsors of Prop 8 contend that the historic purpose of marriage is procreation. Although the Court could potentially rule that a state’s ban on same-sex marriage is unconstitutional, oral arguments indicated that the Court may focus on the narrower question—whether a state can recognize the right of same-sex couples to marry and then take it away. A narrow interpretation by the Court would only apply to California and would not change the status quo in which plans must navigate between different state and federal law mandates. 

Which states currently permit same-sex marriages?
Connecticut, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont, Washington, and Washington D.C. Several other states besides California appear to be on the verge of joining this group. Some of these states require little or no residency to get married, so same-sex couples from around the country could get married in those states. In addition, a number of countries permit same-sex marriage, such as Canada. If same-sex marriage is recognized at the federal level, presumably same-sex couples legally married under state law, or perhaps the law of another country, would also be legally married for federal law purposes.

How could qualified retirement plans be affected?
The DOMA definition of spouse currently applies to qualified retirement plans. Therefore, under current law, parity in benefits for same-sex spouses requires plan amendments. For example, to provide an annuity form of payment to a same-sex spouse, defined benefit plans can be amended to include a joint and survivor annuity with the participant’s choice of beneficiary. To provide a hardship withdrawal for an event affecting a same-sex spouse, defined contribution plans can be amended to permit distributions for financial hardships affecting a participant’s primary beneficiary.

If same-sex marriage is recognized at the federal level, presumably plan sponsors will be required to interpret the term “spouse” in qualified retirement plans as including a same-sex spouse. There seems no basis on which a plan could define “spouse” to exclude legal same-sex spouses without the support of DOMA. Therefore, same-sex spouses would be entitled to the same spousal rights as opposite sex spouses, such as survivor benefits and rights to consent to another beneficiary, without having to amend the plan. It is possible, though perhaps remote, that “spouse” at the federal level would also include registered domestic partnerships.

How could self-insured health and welfare plans subject to ERISA be affected?
Health and welfare plans that are subject to the Employee Retirement Income Security Act (ERISA) are not governed by state insurance laws because state law is generally preempted by ERISA. Therefore, under current law, these plans can generally choose whether to offer health and welfare benefits to same-sex spouses and domestic partners.

If same-sex marriage is recognized at the federal level, presumably plan sponsors will be required to interpret the term “spouse” in health and welfare plans as including a same-sex spouse. However, because there is currently no federal law mandate for spousal coverage, it would, in theory, be permissible to deny coverage to same-sex spouses, yet offer coverage to opposite sex spouses. This approach would be inherently discriminatory.

How could self-insured health and welfare plans not subject to ERISA, or insured health and welfare plans, be affected?
Health and welfare plans that are not subject to ERISA (such as governmental and church plans), and insured health and welfare plans, should already be complying with state law mandates regarding same-sex spouses and registered domestic partners. (Although insured health and welfare plans are ERISA plans, the underlying insurance plan is governed by state law.)

If same-sex spouses are recognized at the federal level, there should be no change in practice for these plans because the meaning of “spouse” is already governed by state law. However, an open question is how these plans should respond in states that do not recognize same-sex marriage.

What about federal COBRA?
Currently, the DOMA definition governs the meaning of “spouse” under federal COBRA, which means that same-sex spouses do not have a legally protected right to COBRA benefits. However, group health plans may offer optional COBRA-like benefits to domestic partners, same-sex spouses and their dependents. If same-sex marriage is recognized at the federal level, presumably a same-sex spouse will have a protected right to elect federal COBRA coverage.

What about HIPAA special enrollment rights?
Currently, the DOMA definition governs the meaning of “spouse” (although under HIPAA regulations, special enrollment rights may extend to domestic partners and same-sex spouses when they lose other coverage if they are covered by the plan’s definition of “dependent.”). If same-sex marriage is recognized at the federal level, presumably all HIPAA special enrollment rights for opposite-sex spouses should also be offered to a same-sex spouse.

What could be the federal tax consequences for health plan coverage?
If same-sex marriage is recognized at the federal level, the tax treatment of benefits under health plans for same-sex spouses should become much easier. Currently a same-sex spouse gets tax-free coverage at the federal level only if he or she is a federal tax dependent of the employee. This means that a plan sponsor must analyze tax dependent status, require tax certifications and impute income for a non-tax dependent same-sex spouse’s coverage. Without DOMA, all same-sex spouses could get federal tax-free coverage. The employee could pay pre-tax premiums under a cafeteria plan, and may claim reimbursement for the same-sex spouse’s medical expenses under an FSA, HRA or HSA.

Will states that do not permit same-sex marriage be required to recognize same-sex marriages from other states?
Under Section 2 of DOMA states are not required to recognize same-sex marriages (or other same-sex relationships) validly formed in other states. This section is not being reviewed by the Supreme Court, which means that a state not recognizing same-sex marriage (such as Arizona) could continue to rely on Section 2 of DOMA in denying recognition to a same-sex marriage from another state (such as Washington). This could lead to many problems in practice as it is unclear for employee benefit plan purposes which state’s law would govern—it could depend on residency, state of employment, or another factor.

How should plan sponsors prepare?
Plan sponsors should be aware of the consequences to their benefit plans if same-sex marriage is recognized at the federal level, and plan ahead for the results described above.

Pending a decision, plan sponsors should:

  • Review the definition of “spouse” in their benefit plans and domestic partner policies for clarity and consistency;
  • Determine whether the definition of “spouse” is based on federal or state law;
  • Determine whether same-sex marriages from other states or countries will be recognized; and
  • Determine what benefits will be provided to domestic partners (same or opposite sex).

If you have any questions, please contact your usual Davis Wright Tremaine benefits lawyer.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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