On June 26, 2013, the Supreme Court issued decisions in two landmark cases, finding Section 3 of the Defense of Marriage Act (“DOMA”) unconstitutional and paving the way for the resumption of same-sex marriage in California. The fallout of these rulings will have an instant and dramatic impact on employee benefit packages as they relate to same-sex couples. Due to the fact that the Supreme Court rulings will take immediate effect, employers should be developing plans for how to handle benefits for same-sex spouses based on the outcome of these cases.
Previous State of the Law
DOMA was enacted by Congress in 1996. At that time, no state had legalized same-sex marriage; however, a number of states seemed prepared to do so. States that did not want to legalize same-sex marriage were concerned that they would have to legally recognize out of state marriages under the Full Faith and Credit Clause of the Constitution. DOMA offered two main provisions in response to these concerns. First, Section 2 states, ‘‘No State…shall be required to give effect to any public act, record, or judicial proceeding of any other State…respecting a relationship between persons of the same-sex that is treated as a marriage under the laws of such other State…, or a right or claim arising from such relationship.” Section 3 goes on to define marriage on the federal level as being “only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.’’
In the years following the enactment of DOMA, twelve states have legalized same-sex marriage. During that same period, thirty states have amended their state constitutions, prohibiting the recognition of same-sex marriage. An additional eight states have statutorily prohibited such recognition. These laws and amendments have been nicknamed state “mini-DOMA’s.”
Proposition 8 is California’s mini-DOMA amendment to its state constitution. On November 4, 2008, Proposition 8 narrowly passed a statewide vote ending a four month period where same-sex marriages were legal in California. The amendment provided that “only a marriage between a man and a woman is valid or recognized in California.”
Cases Decided by the Supreme Court
In U.S. v. Windsor, the surviving spouse of a legally married same-sex couple who had been together for 44 years challenged the constitutionality of Section 3 of DOMA. Edith Windsor sued to recover over $350,000 in federal estate taxes she paid following the death of her spouse. Had she been married to an individual of the opposite sex, the federal government would not have required the payment of these taxes. Windsor argued that DOMA violated the Equal Protection Clause of the Fifth Amendment based on the fact that it recognized marriages between individuals of the opposite sex and not between same-sex couples. The Obama administration expressly stated that it would not defend the constitutionality of DOMA. In response, the Bipartisan Legal Advisory Group (“BLAG”) of the U.S. House of Representatives retained attorneys to defend DOMA’s constitutionality. After the Southern District of New York ruled in favor of Windsor, the Second Circuit affirmed, holding that Section 3 of DOMA was an unconstitutional violation of the Equal Protection Clause because it did not substantially relate to an important government interest.
The Supreme Court heard oral arguments in Windsor on March 27 of this year. On appeal, the Court focused on three issues while considering whether Section 3 of DOMA was unconstitutional. The first two issues were procedural, while the third was substantive. The Court determined whether it had jurisdiction to hear the case given that the Obama administration had stated that Section 3 of DOMA was unconstitutional. Second, the Court decided whether BLAG would have been injured and, therefore, had standing to defend the case if DOMA were to have been ruled unconstitutional. If the procedural matters were resolved, the Court had to determine whether Section 3 of DOMA did in fact violate the Equal Protection Clause as held by the Second Circuit.
Hollingsworth v. Perry was filed on behalf of two same-sex couples who were denied the ability to marry after Proposition 8 passed in November of 2008. This case was initially filed against California’s Governor and Attorney General; however, both declined to defend the constitutionality of Proposition 8. Instead, ProtectMarriage.com, the original proponents of Proposition 8, intervened to defend the case. In February of 2012, the Ninth Circuit held that California had no legitimate interest in amending the state constitution to remove same-sex couples’ right to marry.
One day prior to hearing the Windsor case, the Supreme Court heard oral arguments in Hollingsworth. Here again the Court was asked to resolve both a procedural and a substantive issue. First, as in Windsor, the Court had to decide whether ProtectMarriage.com had any standing to defend the case. Second, provided the procedural matter was resolved, the Court had to determine whether Proposition 8 was an unconstitutional violation of the Equal Protection Clause.
Rulings and Their Effect on Employee Benefit Plans
Ultimately, the Court held that Section 3 of DOMA was unconstitutional while finding that the proponents of Proposition 8 did not have legal standing to defend it. The aggregation of these decisions will dramatically affect the landscape of employee benefit obligations as they pertain to spousal and even child benefits. While these rulings will have the effect of extending numerous benefits to same-sex spouses at the federal level, they will also likely create a state of chaos for employers attempting to determine what obligations they owe employees’ same-sex spouses.
First, the Court simply declined to rule on the substantive issues contained in the Hollingsworth case. With the presence of procedural questions regarding proper jurisdiction and standing, the Court punted the substantive issue, overturning the case on procedural grounds. This ruling cleared the way for the resumption of gay marriage in California while avoiding the substantive issue of constitutionality.
The Supreme Court did rule on the substantive issue in Windsor, finding Section 3 of DOMA unconstitutional. In doing so, the court recognized that its ruling has wide reaching affects, as DOMA was applicable to over 1,000 federal laws and regulations. A portion of those laws police federally mandated employee benefits. Generally speaking, by ruling that Section 3 of DOMA was unconstitutional, the Court has stated that all federally mandated benefits that are currently extended to opposite-sex spouses will be immediately extended to same-sex spouses. However, the consequences of this ruling are not nearly so simple. Some of the major benefits that are at issue include:
The right to take leave under the Family and Medical Leave Act (FMLA) to care for a same-sex spouse;
Coverage to same-sex spouses under the Consolidated Omnibus Budget Reconciliation Act (COBRA);
Enrollment rights under Health Insurance Portability and Accountability Act (HIPAA);
Joint and survivor annuities to same-sex spouses in defined benefit pension plans;
Federal income tax treatment of health coverage for an employee’s same-sex spouse;
Beneficiary designations under 401(k) plans;
More favorable tax status for same-sex couples’ children and step children; and
Hardship distributions under the Pension Protection Act of 2006.
These federal benefits are now owed to employees who work and live in the twelve states that legally recognize and allow same-sex marriages. Employers in these jurisdictions should review and amend their benefit plans to come into compliance with the mandates of the federal law. The Windsor ruling will make thing easier for these employers in the long run, once the initial updates to their plans are completed, by letting them treat all married employees in these states the same way for benefit purposes.
Though the Court’s ruling has simplified things for employers operating solely in the twelve states that have legalized same-sex marriage, it simultaneously has created numerous questions and complexities for employers throughout the rest of the country. First, it is unclear how an employer should handle an employee who was married in a jurisdiction that recognizes same-sex marriages but lives and works in a state that does not. Due to the fact that Section 2 of DOMA was not challenged in the Windsor case, states where laws or amendments have been passed strictly defining marriage as a union between a man and a woman will still not be required to recognize same-sex marriages entered into in states where such marriages have been legalized. This will lead to situations where couples who are legally married in one state move to a state with a valid mini-DOMA law and are no longer recognized as being married. It is unclear what effect this will have on employee benefit plans. If these individuals are not recognized as being married at the state level, it seems plausible they will not be recognized as legally married at a federal level. This could mean that same-sex spouses, who are legally married in one state, could potentially not be entitled to mandated federal or state spousal benefits as a result of living in a state with a mini-DOMA law. The other possibility is that the federal government would recognize these individuals as legally married while the mini-DOMA state would not. This would result in inconsistencies and confusion throughout the federal and state systems regarding what individuals are and are not entitled to federal and state mandated benefits.
Second, more confusion will arise for employers who operate across state lines. The Court’s ruling in Windsor does not state that same-sex marriage is a constitutional right, and, as previously, mentioned the mini-DOMA laws of thirty eight states are still valid. As a result, large multistate employers will need to determine what benefits are owed to employees in different jurisdictions. This will create a web of complexity for multistate employers, which will likely result in inconsistencies in employee benefit plans across companies based on the different laws of the locations in which they operate. It is unclear whether employers should or will use a single standard for their plans across all states in which they conduct business. It is also unclear whether federal law now deems it discriminatory to administer a plan recognizing same-sex spouses residing in one state but not in a state which does not recognize such unions.
Third, there is the issue of retroactivity. It is unclear whether plans should be administered prospectively from the date of the decision or whether must they be applied retroactively. By holding Section 3 of DOMA unconstitutional, the Supreme Court has essentially said that DOMA should never have been in effect. Though the Court did not speak on the issue of retroactivity directly, the ruling may have the effect of exposing employers and the government to retroactive benefit claims. Things like tax refunds on employer and employee payroll taxes that were paid on imputed income from health benefits received by same-sex spouses or death benefits provided by pension plans could be sought retroactively by same-sex couples.
There is an additional lack of clarity with regard to whether employers are going to be granted a grace period to make corrections to their plans in order come into compliance with the changing laws. What is clear is that the holdings in these cases will require additional clarification from the courts and federal and state agencies.
Employers still have some flexibility in deciding whether to offer certain non-mandated benefits to same-sex spouses. An example would be an employer’s ability to determine what benefits are offered in a group health plan. Because of this flexibility, employers should also be considering the liability exposure created by granting benefits to opposite-sex spouses and then denying those benefits to same-sex spouse, especially now that the federal government does not distinguish between the two. Though it is unclear whether the rulings in these cases will result in employers being subject to federal mandates in certain states, treating same-sex and opposite-sex couples differently could make employers vulnerable to discriminations suits.
Employers should review their benefit plans to determine whether their current plans will require amendments to affect change to federally mandated benefits to same-sex spouses. Prior to the issuance of any additional guidance from the courts, or federal or state agencies, employers are free to make decisions about how to proceed on the multitude of unanswered issues. Ideally, employers should choose a reasonable course of action and adhere to it, communicating their decisions amongst their workforces in an effort to avoid confusion and future litigation.