Supreme Court Review of Same-Sex Marriage Cases Could Require Significant Changes to Employee Benefits

by Snell & Wilmer
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In our 2012 End of Year Plan Sponsor “To Do” Lists, we indicated that there was a strong possibility that the Supreme Court would grant certiorari this term in a series of cases challenging Section 3 of the Defense of Marriage Act (“DOMA”).[1] On December 7, 2012, the Supreme Court granted certiorari in a DOMA case[2] as well as the California Proposition 8 (“Prop 8”) same-sex marriage ban case.[3] Oral arguments for these cases have been scheduled for late March of 2013 with a decision expected in late June of 2013. Any Supreme Court decision will likely take effect immediately, leaving employers to scramble if they have not previously given thought to how a decision overturning Section 3 of DOMA might impact their employee benefits.  

DOMA affects employee benefit plans because, while DOMA is the law, employers are unable to treat same-sex spouses the same as opposite-sex spouses for many employee benefit plan purposes. As a result, many employers offer very limited same-sex spouse benefits. The benefit most often extended to same-sex spouses is group health plan coverage. As a result of DOMA, many employers amended their employee benefit plans, especially qualified pension plans, to define a spouse as only an “opposite-sex spouse.”

Potential Scenarios
There are three possible scenarios with respect to the Prop 8 and DOMA cases.

  1. Status Quo: First, the Supreme Court may overturn both cases, meaning that Prop 8 and Section 3 of DOMA would be constitutional. Under this scenario, same-sex marriage in California will not be legal and for purposes of federal law, same-sex spouses (who are legally married in states or countries that recognize same-sex marriage) will not be considered to be married. From an employee benefits perspective, very little would change.
  2. Section 3 of DOMA Overturned and States Allowed to Define Marriage: Second, the Supreme Court could split its decision. For example, the Court may hold that states may enact laws regarding marriage (for example states may ban same-sex marriages from being performed and refuse to recognize them for various purposes), but there is no legitimate reason for the federal government not to recognize same-sex marriages performed in states or countries that permit them, and treat them the same as opposite-sex marriages.
  3. Section 3 of DOMA and Prop 8 Overturned: Lastly, the Supreme Court may uphold both cases, meaning that Section 3 of DOMA and Prop 8 would be unconstitutional. If the Supreme Court overturns Prop 8, it is not clear whether the holding will be narrow or broad. The Prop 8 case deals with the specific issue of California taking away a right that it had previously granted to its residents. If the Supreme Court takes a narrow view of the case and rules specifically on the issue of taking away a previously granted right, same-sex marriage would again be legal in California, but the laws of other states banning same-sex marriage would likely not be affected. This could result in confusion about whether a couple is married for employee benefit purposes. For example, if a couple enters into a valid same-sex marriage in Massachusetts and moves to Arizona, which does not recognize same-sex marriage, is the couple married? Which law controls? Is it the state law in which the marriage was performed or the state law in which the couple resides? In the event of a narrow holding, hopefully the federal agencies will be quick to issue guidance filling in the gaps.

Alternatively, the Supreme Court could rule much more broadly that Prop 8 and all other state laws banning same-sex marriage are null and void. This would be similar to what the Supreme Court did in 1967 in Loving vs. Virginia.[4] This would have the effect of legalizing same-sex marriage throughout the United States.

If Section 3 of DOMA is Unconstitutional
If the Supreme Court decides that Section 3 of DOMA is unconstitutional under either Scenario 2 or 3, it will represent a major change for employee benefit plans because federal mandates that apply to spouses would be extended to same-sex spouses. If Section 3 of DOMA is overturned, it will require employers to offer most, but not necessarily all, employee benefits and protections to same-sex spouses. For example:

  • employees would be allowed to take leave under the Family and Medical Leave Act (“FMLA”) to care for a same-sex spouse;
  • if a health plan covers same-sex spouses, it would have to provide coverage to same-sex spouses under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) upon the occurrence of a qualifying event (such as divorce or the employee’s termination of employment);
  • if a health plan covers same-sex spouses, it would have to offer special enrollment rights under the Health Insurance Portability and Accountability Act (“HIPAA”) when a participant marries a same-sex spouse;
  • defined benefit pension plans would have to offer qualified joint and survivor annuities (“QJSAs”) to same-sex spouses;
  • Section 401(k) and 403(b) plans would have to require same-sex spouses to consent to beneficiary designations in favor of anyone other than the same-sex spouse;
  • qualified plans would have to honor qualified domestic relations orders (“QDROs”) in favor of same-sex spouses; and
  • qualified plans would have to treat same-sex spouses as spouses for purposes of the required minimum distribution provisions.

Also, and very importantly, if Section 3 of DOMA is overturned, health and welfare benefits provided to same-sex spouses could be provided on the same tax-favored basis as they are currently provided to opposite-sex spouses. This means premiums for same-sex spouse coverage could be paid on a pre-tax basis, reimbursements under health flexible spending accounts could be made for same-sex spouses, and plans could also allow mid-year election changes under Section 125 plans for same-sex spouses.

Because so many of these benefits and protections will have to be extended to same-sex spouses, many employers will likely decide it is easier to treat same-sex spouses the same as opposite-sex spouses for all purposes. However, if Section 3 of DOMA is overturned, there will still be some discretion for employers to decide whether to offer certain non-mandated benefits to same-sex spouses. For example, there is no federal law that requires employers to offer group health plan coverage to spouses. Even under the new large employer play or pay penalties that take effect in 2014, employers are not required to offer group health plan coverage to spouses. With respect to such non-mandated benefits, employers will need to consider whether they want to continue to distinguish between same-sex and opposite-sex couples.

Employers who continue to distinguish between same-sex and opposite-sex couples should consider the impact of state nondiscrimination laws. Many states have laws that prohibit employers from discriminating based on sexual orientation, gender identity, or marital status. There are arguments that such laws are preempted by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), meaning such laws do not apply to ERISA pension or welfare plans. However, ERISA preemption can be hard to predict. Furthermore, even if an employer wins on the ERISA preemption issue, the negative press from defending a lawsuit denying same-sex spouse benefits may not be worth it.

Domestic Partner Benefits
If Section 3 of DOMA is overturned, it will likely cause many employers to reconsider whether domestic partner benefits are necessary. Many employers first offered domestic partner benefits in an effort to equalize the benefits provided to married couples with the benefits provided to couples who could not get married. If same-sex marriage is legalized in all states (the broad ruling described under Scenario 3), arguably the need for domestic partner benefits is lessened. However, some employers may want to continue to provide domestic partner benefits for other reasons, for example for senior citizens so they do not have to forgo Social Security survivor’s benefits when they re-marry. Also, the ability to eliminate some domestic partner benefits will remain subject to state law.

Conclusion
Because the Supreme Court rulings will likely take immediate effect when they are issued, employers should start thinking now about how they will handle benefits for same-sex spouses if Section 3 of DOMA is overturned. Employers need to consider how they will implement all federally mandated spousal benefits and protections and whether their plans will require amendments to affect the changes. Employers should also consider whether they wish to continue distinguishing between same-sex and opposite-sex spouses, and the extent to which they can do so if Section 3 of DOMA is overruled. Additionally, they should consider how that decision may be affected by state non-discrimination laws or viewed by employees and the public.

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Notes

[1] Section 3 of DOMA currently provides that for purposes of federal law, “marriage” means only a legal union between one man and one woman as husband and wife. Under this same Section of DOMA, “spouse” refers only to a person of the opposite sex who is a husband or wife. DOMA does not invalidate same-sex marriages, but, under DOMA, certain federal benefits can only flow to opposite-sex spouses. [back]

[2] The DOMA case, United States v. Windsor, 699 F.3d 169 (2d. Cir 2012), is a constitutional challenge to Section 3 of DOMA. In Windsor, a woman was required to pay $363,000 in federal estate taxes after the Internal Revenue Service declined to treat her as the spouse of her same-sex partner (the couple was legally married in Canada) for purposes of the spousal exemption from the estate tax. On challenge, the Second Circuit Court of Appeals held that Section 3 of DOMA is unconstitutional and there is neither a rational basis to support discrimination, nor is the provision substantially related to an important governmental interest. [back]

[3] The Prop 8 case, Hollingsworth v. Perry, 671 F.3d 1052 (9th Cir. 2012), is a constitutional challenge to California’s voter-approved Proposition 8 ballot initiative, which amended the California constitution to define marriage as between a man and a woman. Prior to the passage of Prop 8, same-sex marriage was permitted in California for a short period of time. On challenge, the Ninth Circuit Court of Appeals held that Prop 8 is unconstitutional and violates the equal protection clause of the 14th Amendment because it used a “campaign of animosity” to rescind a previously granted constitutional right. The Court further held that the state had no compelling interest in denying marriage to same-sex couples who had that right prior to the passage of Prop 8. [back]

[4] In Loving v. Virginia, 388 U.S. 1(1967), the Supreme Court invalidated Virginia’s law banning interracial marriage. The ruling that Virginia’s law was unconstitutional made interracial marriage bans in all states unenforceable, even if the laws remained on the books. [back]

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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