The regulation of marriage was historically presumed to be the exclusive domain of the states. Since 1996, however, the Defense of Marriage Act of 1996 (“DOMA”)1 changed this presumption in two important respects:
DOMA section 2 permitted states to refuse to recognize same-gender marriages performed under the laws of other states; and
DOMA section 3 barred same-gender married couples from being recognized as “spouses” for all purposes of Federal law.
In a much anticipated decision, United States v. Windsor,2 the U.S. Supreme Court recently ruled that DOMA’s definition of “spouse” (DOMA section 3) is unconstitutional “as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment.”
There are over 1,300 federal statutes that either confer separate or unique benefits, or impose separate or unique obligations, on married individuals. These statutes include the Internal Revenue Code (the “Code”), the Employee Retirement Income Security Act (ERISA), and the Family and Medical Leave Act (FMLA). As a consequence, the Supreme Court’s ruling in Windsor has far reaching and important consequences that include the rights and duties of same-gender spouses under a broad range of employee benefit plans, programs, and arrangements.
The Supreme Court did not disturb the provisions of DOMA that allow states to refuse to recognize same-gender marriages performed under the laws of other states. Thirteen states and the District of Columbia currently recognize same-gender marriages. A handful of other states recognize some sort of equivalent right — e.g., civil unions. Thirty-seven states, however, have DOMA-like statutes that define the term “spouse” for purposes of state law as a union of one man and one woman. Thus, the Supreme Court has left a patchwork of conflicting state laws under which the terms “married” or “spouse” will have different meanings for purposes of state law. This will present particular challenges to employee benefit plans maintained by multistate employers.
Following the Supreme Court’s decision, same-gender married couples (but not non-dependent domestic partners) will be taxed for Federal income tax purposes in the same way that any other married couples are taxed. For legally married, same-gender couples residing in states that recognize same-gender marriages, the principal benefits-related consequences include tax-free treatment of health care coverage (dental and vision included), access to pre-tax treatment under an employer’s section 125 plan, access to COBRA coverage as a matter of right, eligibility for HIPAA special enrollment rights, and access to pension survivor rights, among others. Thus, for example, employers will no longer be required to impute income to employees whose same-gender spouses are covered under the employees’ health insurance. Such couples will also qualify for leave under the FMLA.
The Supreme Court’s decision has left us with many questions, some of which can be answered by the regulators, others of which will be sorted out, if at all, by the courts. Set out below are some of the most pressing questions for employer-sponsored employee benefit plans:
(1) Does the decision apply retroactively — that is, can affected employees file for a refund of taxes paid on their imputed income?
The Treasury Department and IRS will need to provide guidance on this issue. Code section 7805(b) confers on the Secretary of the Treasury broad powers to apply the decision prospectively only. If refunds are permitted, they will apply only to “open” tax years, i.e., years for which the tax statute of limitations (generally three years) has not expired. What the Secretary decides will also affect whether employers can make adjustments to the quarterly payroll tax remittances for periods before June 26 (the date on which Windsor was decided).
(2) Must an employee benefit plan cover same-gender spouses?
The Court did not say. In the case of fully-insured welfare benefit plans, state insurance law will control. In most if not all instances, this will require that same-gender spouses be treated the same as any other spouse. But state law does not apply in the case of self-funded plans. Thus, it would appear that a private sector self-funded group health plan could still deny coverage to same-gender spouses. Such an approach might be vulnerable to challenge based on discriminatory treatment, however, in a state in which marital status is a protected class.
(3) What happens if a validly married same-gender couple moves to a state where such marriages are not recognized?
This is another question about which the Windsor decision is silent. Recall that DOMA section 2 survived. That section reads:
No State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship. (Emphasis added).
Thus, while a state cannot be required to recognize same-gender marriages for purposes of any of its laws, employee benefit plans should be free to do so. (Guidance to this effect would be welcome.) Where benefits are provided, income would in all likelihood need to be imputed for state tax purposes.
(4) Do same-gender spouses in states that recognize their marriage have HIPAA special enrollment rights that would allow a same-gender spouse to be added to an employer’s group health plan mid-year?
Most likely, yes. Under Code section 9801(f)(2)(A)(iii), a special enrollment right arises when “a person becomes such a dependent of the individual through marriage, …” The special enrollment right election period must be at least 30 days, and coverage may be applied retroactively only if elected by the participant within the first 30 days of the special enrollment period.
(5) If a same-gender spouse takes advantage of his or her special enrollment right (see Question 4 above), may the employee make a corresponding mid-year election change under the employer’s section 125 cafeteria plan such that any increase in premiums is pre-tax?
Again, the answer is most likely, yes. The applicable treasury regulation (Treas. Reg. section 1.125-4(c)(2)(i)) permits a mid-year election change in the case of an event that “change[s] an employee’s legal marital status, …” And, again, this is an item with respect to which guidance would be welcome.
(6) What is the impact on employers with operations in multiple states? Can they apply a single standard? Or must they separately apply each state’s rules?
As explained in question 3 above, DOMA section 2 is directed at states and state law, not Federal law. Presumably, an employer could choose to apply a single standard — e.g., an individual is married for plan purposes if his or her marriage was valid in the state in which it was performed.
(7) Are same-gender spouses entitled to all the survivorship rights accorded traditional married couples under a tax qualified retirement plan?
After Windsor, there is no longer a uniform definition of “married,” “marriage,” or “spouse” for purposes of Federal law, which includes ERISA and the Internal Revenue Code. For the sake of ease of administration, employers would be well served if the Treasury Department and IRS adopted a rule under which a marriage is deemed valid for pension plan purposes if the marriage was valid under the laws of the state in which it took place.
(8) Are elections to designate a beneficiary other than the same-gender spouse under a tax-qualified retirement plan still valid?
Unlikely, particularly if the regulators treat same-gender spouses as newly married as a result of Windsor.
(9) A lump-sum distribution from a pension plan (without any waiver of spousal rights) was previously provided to an employee who was (and remains) validly married to her same-gender spouse. Post-Windsor, the spouse brings a claim against the plan for failure to provide her with survivor benefits. Is the plan liable?
We don’t know. Since the claim would arise under ERISA and not the Internal Revenue Code, there is no regulatory mechanism by which the holding in Windsor might be applied only prospectively. This is a matter that will have to be determined by the courts.
So what’s an employer to do? The obvious first — and critically important — step is to review plan documents to determine how the terms “spouse” and/or “married” are defined. Changes may be required to bring plans into compliance with the new rules and/or to make changes to plan design. And employers in states that recognize same-gender marriage should, of course, stop imputing income immediately. While it might be tempting to refund withheld taxes retroactively, the more prudent approach may be to wait to see what the regulators say. In contrast, the law governing special enrollment rights and mid-year cafeteria plan elections seems pretty clear, so employers might want to permit such changes without dely. But an employer could not be faulted for taking a more cautious approach.
Hopefully, we will begin shortly to get guidance that provides answers to the questions set out above and others.
1 Pub.L. 104–199, 110 Stat. 2419 (Sept. 21, 1996).
2 __ U.S. __ (2013).