On June 26, 2013, in a 5-4 vote the U.S. Supreme Court ruled that the 1993 Defense of Marriage Act (DOMA) was unconstitutional as a violation of Fifth Amendment guarantees of equal protection and equal liberty. The case, United States v. Windsor No.12-307(US June 26, 2013) http://www.supremecourt.gov/opinions/12pdf/12-307_6j37.pdf dealt with the marital exclusion under the federal estate tax law. The implications of the Ruling may be extensive. Other commentators have suggested that there are over 1,000 federal statutes that address rights of married couples. Under those statutes, the determination of someone’s marital status will impact one’s eligibility for federal benefits. Just some of the examples are: federal social security survivor benefits, veteran’s survivor benefits, federal income tax exclusions, unlimited gift and estate tax exclusion and benefit plan protections under ERISA, COBRA, HIPAA, FMLA, etc.
Many practitioners believe that it will be difficult for employers to respond to the Windsor case without regulatory guidance from the federal government. Specifically, it is unclear whether for federal purposes the determination of marital status is to be based on the state where the couple celebrated the marriage or the state of residence. For example, if a same sex couple marrying in Minnesota after August 1, 2013 then moves to Texas or Florida (states that do not recognize same sex marriages) will a surviving same sex spouse’s eligibility for social security and pension benefits be determined under those state’s laws (the individuals are not married) or under the state in which the marriage was celebrated (Minnesota)?
Implications for employers/plan sponsors.
The Windsor case did not change federal income tax rules regarding taxation of domestic partners. Employers should continue to impute income if they provide health coverage to non-married domestic partners. However, if the “domestic partner” is a lawful spouse in a state that recognizes same sex marriages, the income imputation should stop immediately and consideration given to filing for refunds of both employer and employee withholding taxes for open years. Legal same sex spouses, in states recognizing such status, will now presumably be eligible for COBRA continuation benefits, HIPAA open enrollment options and possibly, change in status options to modify cafeteria plan elections during a period of coverage.
Pension and Profit Sharing Plans
There are a number of federal protections for spouses under the Retirement Equity Act of 1984 including pre-retirement survivor annuities and required spousal notices and consents prior to waiving survivor benefits. Many defined contribution plans (especially 401(k) plans) provide for hardships based upon medical expenditures for a spouse and allow minimum required distributions at age 70½ to be based on the joint life expectancy of the employee participant and the “spouse.” The Internal Revenue Code provides special rollover rules and waiver of penalties for early (pre-59 ½) distributions to spouse and ex-spouses subject to a qualified domestic relations order or QDRO. On that last point, plans will need to use their existing procedures or develop new ones on how to respond to domestic relation orders purporting to assign pensions, deferred compensation and stock options to a same sex former spouse.
We understand that the Administration has directed the various agencies to fast track regulatory guidance on many of these issues so we expect to see guidance in the near future. In the meantime, employers should begin reviewing payroll procedures and employee benefit plan designs and definitions to determine the impact of the Supreme Court Ruling.