On June 26, 2013, the Supreme Court issued its landmark ruling in Windsor v. United States holding that same-sex marriages valid under state law are now recognized at the federal level, thereby transforming the treatment of same-sex married couples in the United States.
While many implications remain unsettled, the Windsor decision has an immediate impact on employee benefit plans. This advisory provides a summary of Windsor and also the decision in Hollingsworth v. Perry, the impact of these decisions on benefit plans, and action items.
On June 26, the U.S. Supreme Court affirmed the 2nd Circuit Court of Appeals’ finding in Windsor and ruled that those challenging a California state court’s decision in Perry lacked standing to do so:
At issue in Windsor was whether Section 3 of DOMA violates the U.S. Constitution’s 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 same-sex 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. The Supreme Court, in a narrowly drafted opinion, held that the failure of Section 3 of DOMA to recognize same-sex marriages valid under state law created a subset of unequal marriages in violation of the due process and equal protection clauses. The Court narrowly confined its holding to “couples joined in same-sex marriages made lawful by a state.” While the Supreme Court did not give recognition to a constitutional right to same-sex marriage, as the dissenting opinion by Scalia points out, that shoe may drop in the future. Currently, the holding means that all federal rights and mandates that apply to opposite-sex spouses also apply to same-sex spouses recognized under state law. One significant open question is how the decision impacts the rights of same-sex spouses in states that do not recognize same-sex marriages.
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. After the California Supreme Court upheld Prop. 8, Perry filed suit in federal court and argued that Prop. 8 violated the due process and equal protection clauses of the Federal Constitution. The District Court declared Prop. 8 unconstitutional and the 9th Circuit affirmed. The Supreme Court, however, held that the proponents of the initiative who appealed the District Court’s decision lacked standing to bring the appeal. The Supreme Court vacated the opinion of the 9th Circuit and remanded with instructions to dismiss the appeal. In response, California Gov. Brown has already ordered state officials to issue marriage licenses to same-sex couples in California as soon as the 9th Circuit formally vacates its opinion and lifts a stay on further proceedings.
The analysis in the Q&A below applies to employers with employees residing in states that permit same-sex marriage; however, until further guidance is issued, it is unclear whether this analysis applies to employees residing in the other 38 states (see further discussion below).
Which states currently permit same-sex marriages?
Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, and Washington D.C. all permit same-sex marriage. California is expected to rejoin 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. The effect of Windsor is that if a marriage is recognized by a state, it will be recognized at the federal level. Although plan sponsors could choose to recognize same-sex marriages, even in states that do not recognize such marriages, it is unclear how the decision will impact the tax treatment and benefits in those states.
Do the decisions impact domestic partners or civil unions?
No. At the federal level, the decisions do not change the status of domestic partners, whether registered or unregistered, or civil unions. To obtain the same benefits as an opposite-sex spouse, same-sex partners must be married. Refer to our previous November 2012 advisory for more information regarding benefits for domestic partners.
How are qualified retirement plans affected?
Plan sponsors are now required to interpret the term “spouse” in qualified retirement plans as including a same-sex spouse. Therefore, same-sex spouses are automatically entitled to the same spousal rights as opposite-sex spouses, such as survivor benefits and the right to consent to another beneficiary.
How are insured health and welfare plans affected?
Insured health and welfare plans are subject to ERISA, but state insurance laws are not preempted. Generally, state insurance laws define a spouse in accordance with the laws of the state in which the contract was delivered. Some states, such as Washington and California, already require parity in insured benefits for same-sex spouses so the Windsor decision should not impact insurance policies issued in those states.
However, if an employer operates in a state that does not recognize same-sex marriage and wishes to change the definition of spouse in the insurance contract, the employer will not be able to do so without the consent of the insurer, and the insurer may also need the consent of the state insurance commissioner. To deal with this, as a starting point, employers should examine the definition of spouse in insured plans to determine whether that is a definition the employer would like to maintain across all its benefit plans. If not, the employer should begin negotiations with its insurer to change that definition.
How are self-insured health and welfare plans affected?
Self-insured health and welfare plans are generally subject to ERISA (see the following paragraph for certain exceptions), but state law is preempted. Pre-Windsor, this meant that self-insured health and welfare plans could restrict benefits to opposite-sex spouses. The effect of Windsor is that the term “spouse” in a self-insured plan should now be interpreted as including a same-sex spouse (while there is currently no federal law mandate requiring spousal welfare-coverage, to deny benefits to same-sex spouses while offering benefits to opposite-sex spouses would be inherently discriminatory and would certainly expose an employer to equal protection claims).
Self-insured plans should also consider whether the definitions contained in its insured and self-insured plans should be consistent.
How are self-insured health and welfare plans not subject to ERISA affected?
Health and welfare plans that are not subject to ERISA (such as governmental and church plans) should already be complying with state law mandates regarding same-sex spouses and registered domestic partners. Also, governmental plans are often established under, and subject to, state statutes. Employers wishing to amend a governmental plan must check that the amendments are permissible under those state statutes.
What about federal COBRA?
A same-sex spouse now has a protected right to elect federal COBRA coverage and employers should offer COBRA to same-sex spouses.
What about HIPAA special enrollment rights?
All HIPAA special enrollment rights for opposite-sex spouses should also be offered to a same-sex spouse.
What about fringe benefit plans?
Tax-free fringe benefits that are available to opposite-sex spouses should now be offered on a tax-free basis to same-sex spouses.
What about FMLA?
As the Family and Medical Leave Act is a federal statute, “spouse” should now be interpreted as including a same-sex spouse, so that a same-sex spouse is entitled to the same FMLA leave as an opposite-sex spouse.
What are the federal tax consequences for health plan coverage?
The tax treatment of benefits under health plans for same-sex spouses (and their children) is now identical to the tax treatment for opposite-sex spouses. This means that, in states that recognize same-sex marriage, employers will no longer be required to impute income or withhold FICA for the employer’s contribution to a same-sex spouse’s medical, dental or vision coverage, and an employee can pay pre-tax premiums under a cafeteria plan for a same-sex spouse, and may claim reimbursement for the same-sex spouse’s medical expenses under an FSA, HRA or HSA.
Pending IRS guidance, a number of uncertainties remain with respect to the tax treatment. First, if the IRS determines that the tax treatment is correctly determined by reference to a state that does not recognize same-sex marriage, it is possible that income should continue to be imputed at the federal level. Depending on where the employer and employee reside, such a rule could lead to nonsensical results. Second, an employer may still be required to impute income to an employee for purposes of state income taxes (even if not required to impute income for federal tax). And third, as discussed below, the effective date of Windsor is uncertain. Employers and employees may be able to amend tax returns for open years to claim refunds for FICA taxes and tax paid on imputed income. Until the IRS issues guidance, employers should consider whether to stop imputing income for health and welfare benefits prospectively. Employers may also wish to correct the imputed income issue to the beginning of the current plan year (1/1/13 for a calendar year plan year) after consulting with legal counsel.
What implications remain unsettled?
Many of the implications for employee benefit plans are unclear at this point. Further guidance on the following issues is expected:
Are these changes automatic and immediate?
The judgment in Windsor does not indicate whether its impact is retroactive or prospective. On the one hand, as section 3 of DOMA has been declared unconstitutional, it is arguable that the effect of Windsor should be retroactive to the time when DOMA was enacted in 1996. However, this would expose plans to claims reaching back to 1996, which would be extremely burdensome. We expect guidance to be issued on this in the near future, and the IRS may invoke IRC Section 7805(b) to permit plans to treat Windsor as having prospective effect only. However, IRC Section 7805(b) relief will not be binding on a claim by a participant or beneficiary for spousal benefits. At the very least, plan sponsors are advised to treat the decision as requiring immediate action for their benefit plans. If future guidance provides that Windsor has retroactive effect, plan sponsors could be required to apply the decision to same-sex spouse employee benefits for the current plan year and prior plan years.
Are states that do not permit or recognize same-sex marriage 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 was not 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). It is unclear for employee benefit plan purposes which state’s law will govern—it could depend on residency, state of employment, or another factor. Additional guidance is needed and the law may differ depending on the federal program or purpose. For example, the IRS could determine that the “state of celebration” governs employee benefit plans, while the “state of residence” governs federal tax treatment.
Following Windsor, employers with employees in multiple states (i.e., in states that permit same-sex marriage and in those that do not) may face large costs and administrative burdens until guidance is issued. Although democrats reintroduced the Respect for Marriage Act in a bill that would also repeal Section 2 of DOMA, for now, in the absence of official guidance, employers may wish to consider adopting a uniform approach regardless of state law differences.
Can employers and employees claim refunds for taxes paid in prior years?
It appears that both employers and employees can claims refunds for open tax years—2010 through 2012, and 2009 if preserved through protective filings this past April. In theory, the decision in Windsor means that employers can file for a refund of FICA taxes for prior open years, and employees can re-file a joint tax return with a same-sex spouse for open years to claim refunds for tax paid on imputed income and for differences due to filing previously as an individual. We expect IRS guidance to be issued on this topic.
Can employees enroll a same-sex spouse in a cafeteria plan outside of open enrollment?
It is unclear whether the change in the definition of “spouse” will be treated as a change in status that allows employees to change their cafeteria plan elections outside of open enrollment. This might arise because an employee now wishes to add a same-sex spouse to his coverage, or because the same-sex spouse now wishes to purchase more expensive coverage. While it seems likely that such a change should be permitted, employers are advised to await additional guidance from the IRS before making any cafeteria plan changes.
What action should an employer take now?
The uncertainties arising from the Windsor decision are likely to remain for some time (possibly years). However, plan sponsors can take action now to resolve at least some of these issues. At a minimum, plan sponsors should decide on the approach that they would like to take, and ensure that all plan documents and employee communications are drafted to reflect that intent. Absent specific state law to the contrary, the language of the plan is likely to be upheld (even though DOMA, Section 2 survives, that section does not preclude a plan sponsor from offering benefits to same-sex spouses residing in a state that does not recognize same-sex marriages).
In addition, plan sponsors should assess policies currently in place to create parity between opposite and same-sex spouses, such as a tax gross up for the imputed income on health and welfare benefits. These types of policies may now be eliminated as the same-sex spouse will be treated the same as the opposite-sex spouse.
Additional items to consider include:
Check definitions in employee benefit plans. Consider whether the definitions are limited to opposite-sex spouses and whether they should be revised to include same-sex spouses. Employers should review all plans, including qualified plans, health and welfare plans, and cafeteria plans.
Decide which state’s law governs. While there is uncertainty at the federal level as to which state’s law will govern, plan sponsors can decide on the approach that they would like to take. For example, a plan sponsor may decide to render the issue moot by recognizing any marriage that was valid in the state or country of celebration.
Full faith and credit. Plan sponsors should decide whether their plans will give full faith and credit to marriages that are valid in another state or country, notwithstanding section 2 of DOMA.
Recognition of civil unions and domestic partnerships. While Windsor recognizes valid state law marriages, plan sponsors should decide how the plan will treat civil unions or domestic partnerships. Will the plan continue to recognize civil unions or domestic partnerships or will it recognize only valid marriages?
Review tax treatment of benefits. Confirm that the tax treatment and general administration of various benefit arrangements are consistent with plan documents and the new law. Consult with payroll to ensure that same-sex spouse benefits are provided pre-tax.
Claim FICA refunds. Decide whether to claim FICA refunds for open tax years.
Prepare for questions. Prepare for questions from employees regarding the impact of the decisions.
Employee communications. Revise employee handbooks, participant communications and internal policies to reflect that “spouse” now includes “same-sex spouse.”