On June 26, 2013, in U.S. v. Windsor, the U.S. Supreme Court held that Section 3 of the Defense of Marriage Act ("DOMA") was unconstitutional. Section 3 of DOMA provided that, for the purpose of any federal law, "marriage" was defined as a legal union between one man and one woman, and "spouse" referred only to a person of the opposite sex who was a husband or wife. Prior to the Windsor decision, same-sex couples, even if married in a state that recognized same-sex marriages, were not treated as married for purposes of federal statutes, such as the Internal Revenue Code. The result of the Windsor decision is that, for the more than 1,000 federal laws and regulations that refer to "marriage" and "spouse," lawful same-sex marriages will now be federally recognized.
Significantly, the Court did not strike down Section 2 of DOMA which gives states the authority to refuse to recognize same-sex marriages performed under the laws of other states.
With this decision, same-sex married couples in states that recognize such marriages will obtain the federal rights and benefits that apply to married couples, as described below, under employee benefit plans. The effect of the decision on same-sex spouses who reside in states that do not recognize same-sex marriage is not clear, however, and we must wait for regulatory guidance on this issue.
The Windsor opinion did not specify when the decision will go into effect, nor whether it will be applied retroactively. The IRS released a statement on June 27, 2013, stating that it is currently reviewing the Windsor decision, and will work with the Department of Treasury and Department of Justice to provide updated guidance as soon as possible. It is expected that such regulatory guidance will be issued in the near future regarding the open question of retroactivity, and possible transition periods going forward. If the Windsor decision is determined to apply retroactively, individuals who were affected negatively by Section 3 of DOMA in the past might have the opportunity to seek tax refunds (at least with respect to years for which the statute of limitations remains open).
Implications of the Windsor Decision on Employee Benefit Plans
State-By-State Determination of Validity of Same-Sex Marriages
Same-sex marriages currently are recognized in Delaware, the District of Columbia, California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington. If an individual entered into a same-sex marriage that is recognized in one of these states AND the individual and the individual's spouse reside in one of these states, then that individual and his or her same-sex spouse will be treated as married for federal laws under the Windsor opinion.
Under current IRS policies, an individual can file his or her federal income tax return as "married filing jointly" or "married filing separately" only if the individual is considered to be legally married in his or her state of domicile. However, there have been exceptions to this policy, such as the recognition by the IRS of "common law" marriages for federal tax purposes regardless of a couple's state of domicile, as long as the marriage was valid in the state in which it was entered. The guidance expected to be issued by the IRS likely will address the treatment, for federal law purposes, of legally married same-sex couples living in states that do not recognize their marriage.
Whether that guidance will provide that same-sex couples married in a state that recognizes same-sex marriage but living in a state that does not will be treated as married for purposes of federal tax and other federal laws is not clear. We have learned that the federal government appears to be leaning toward treating same-sex couples who were married in states that recognize same-sex marriages but who reside in states that do not as married for federal law purposes. Employers with employees in multiple states presumably would prefer this consistency so that all same-sex married couples can be treated the same, regardless of their state of residence.
Tax Policies and Payroll Procedures
Under a longstanding IRS policy, the value of employer-provided health plan coverage provided to a spouse that is recognized as a spouse under federal law, is not taxable to the employee. Because of DOMA, this meant that employers have had to impute income to an employee when health benefits were provided to a same-sex spouse and his or her child, unless the covered individuals qualified as the employee's dependents, which is not usually the case. This imputed taxable income is no longer required for same-sex spouses in recognizing states, and employers should stop imputing income as soon as possible for same-sex married couples who reside in a state that recognizes same-sex marriage.
Furthermore, if the IRS allows same-sex couples with legally valid marriage licenses living in states that do not recognize their marriage to qualify as married for federal tax purposes, the imputed income rules will not apply to those employees either. However, employers should wait for explicit instructions from the IRS before making any changes in payroll for these situations.
Retirement Plans (including, but not limited to, 401(k) plans, pension plans)
All tax-qualified retirement plans and most plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) include provisions that are dependent upon the marital status of the participant in the plan, including the retirement plan features described below.
Remember that, until we receive guidance from the federal government, it is not clear that these rules will apply to employees and their same-sex spouses who were married in a recognizing state but who reside in a state that does not recognize same-sex marriage. Until then, the following rules will apply only for employees in a same-sex marriage who reside in a state that recognizes same-sex marriage.
Qualified Domestic Relations Orders (QDROs): Domestic relations orders requiring the payment of a participant's benefit to his or her same-sex spouse or their children must now be accepted by the retirement plan.
Hardship Distributions: Hardship distributions available under a 401(k) plan now must permit a hardship distribution for certain medical or educational expenses of the same-sex spouse.
Plan Loans: Certain retirement plans (but not all) that permit participant loans require spousal consent to any such loan. The consent of the participant's same-sex spouse now will be required for such a loan.
Spousal Death Benefit: A retirement plan may not pay a death benefit to a beneficiary other than the participant's surviving spouse unless the spouse consents to the designation of a non-spouse beneficiary, and the participant's spouse generally is considered the default beneficiary under the plan if there is no valid beneficiary designation in place. As a result of the Windsor decision, a participant in a same-sex marriage who has designated a beneficiary other than his or her same-sex spouse, or wishes to designate such an individual as his or her beneficiary under the plan, must now obtain the consent of his or her same-sex spouse to the beneficiary designation. Note also that the current beneficiary designations for employees who are in a same-sex marriage may be void if the employee's same-sex spouse did not consent to the naming of another beneficiary.
In addition, a retirement plan that is a defined benefit pension plan or money purchase pension plan must provide a spousal joint and survivor annuity or a preretirement survivor annuity to the same-sex spouse of a participant, unless the spouse has consented to another form of distribution or to another beneficiary.
Minimum Required Distributions at Age 70-1/2: Under the minimum distribution requirements applicable to tax-qualified retirement plans, spouses of deceased plan participants may delay the commencement of benefits for a longer period after the participant's death than non-spouse beneficiaries. The same-sex spouse of a deceased participant now will be able to take advantage of this payment deferral opportunity.
Rollovers: The same-sex spouse of a deceased participant entitled to a death benefit distribution from a tax-qualified retirement plan now will be able to rollover the distribution to an employer plan or IRA in his or her own name, and will no longer be restricted to making a rollover to an inherited IRA.
Health and Welfare Plans
Coverage under Health and Welfare Plans: For health and welfare plans that provide coverage to employees' spouses, for fully insured plans, that coverage must be extended to the same-sex spouses of employees who reside in states that recognize same-sex marriages.
Depending on the guidance to be issued by the federal government, self-insured health and welfare plans that are covered by ERISA may not need to extend coverage to same-sex spouses of employees residing in states where same-sex marriage is not recognized. However, it is unclear whether restricting such coverage in states where same-sex marriages are not recognized could have an adverse impact on the plan's compliance with the discrimination rules under Section 105(h) of the Internal Revenue Code. Employers are cautioned to consider whether denying such coverage to same-sex spouses in states that do not recognize same-sex marriage could violate Code Section 105(h) or other discrimination laws, including Title VII of the Civil Rights Act of 1964.
Cafeteria Plan/Flex Plan Contributions and Reimbursements: Prior to the Windsor decision, employee contributions for health care coverage for same-sex spouses through a cafeteria plan, and flexible spending account reimbursements of same-sex spouses, were required to be made on an after-tax basis, unless the spouse separately qualified as the employee's dependent under federal tax laws. Same-sex spouses and their children in states that recognize same-sex marriage now may be covered under an employer's cafeteria plan, flexible spending account or health reimbursement account on a pre-tax basis.
Note also, that a "change in status event" (allowing for a mid-year election change) occurs for cafeteria plan election purposes if the employee's legal marital status changes. A change in status event also can occur as a result of changes in a spouse's coverage or employment. Now that same-sex spouses and their children are eligible for cafeteria plan coverage on a pre-tax basis, this likely will constitute a change in status event (at least in states that recognize same-sex marriages) that would permit the enrollment of these individuals or a change in the employee's election under the cafeteria plan.
COBRA Rights: COBRA continuation coverage generally is available to employees, spouses and children of employees upon certain qualifying events, including termination of employment, death, and divorce/legal separation. After the Windsor decision, the COBRA continuation coverage rules will apply to same-sex spouses and their children (at least in states that recognize same-sex marriages).
HIPAA: The Health Insurance Portability and Accountability Act (HIPAA) requires that a group health plan allow a newly married participant to add his or her spouse to the plan, and a spouse must be permitted to enroll in the plan if he or she loses coverage under another plan. This rule now likely will apply to same-sex spouses (at least in states that recognize same-sex marriages).
The Family Medical Leave Act ("FMLA") requires private employers with at least 50 employees to grant qualifying employees time off to care for their sick spouse. Employers subject to FMLA must now grant qualifying employees time off to care for their sick, same-sex spouses (at least in states that recognize same-sex marriages).
Treatment of Same-Sex Marriages in Colorado
Employers should be aware that, under anti-discrimination laws in Colorado (and likely in certain other states), employers may not ask for proof of marriage from same-sex couples unless opposite-sex couples also are required to provide such proof.
There are many lingering questions surrounding the Windsor decision that remain to be answered, including when the decision will take effect, and how legally married same-sex couples living in states that do not recognize their marriage will be treated. Employers will need to pay close attention to the guidance addressing these matters that will be issued by federal agencies in the upcoming months. In the meantime, employers should begin to review their employee benefit plan documents, administrative policies and procedures, and payroll systems to make sure that same-sex spouses can be treated the same as opposite-sex spouses. Employers should also consider how to make employees aware of the change in the law, and establish procedures for employees that seek coverage for their same-sex spouses.