On June 26, 20013, the Supreme Court, in U.S. v. Windsor, ruled that Section 3 of the federal Defense of Marriage Act (“DOMA”) is unconstitutional. Section 3 of DOMA had provided that only persons of the opposite sex could be recognized as “spouses” and “married” for purposes of federal law. Because DOMA had limited the definition of “marriage” and “spouse” to only opposite-sex couples, same-sex couples that were legally married under the laws of their respective states were subject to differential legal protections and tax treatment of spousal retirement and health care benefits.
The majority ruled that DOMA violates the US Constitution’s equal protection clause by singling out a class of persons entitled to marry under state law. Same-sex couples currently may marry in California, Connecticut, Delaware (starting July 1), the District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota (Aug. 1), New Hampshire, New York, Rhode Island (Aug. 1), Vermont, and Washington. Nothing in the ruling requires other states to issue same-sex marriage licenses or recognize same-sex marriages performed elsewhere – raising important questions about which state’s marriage laws will come into play when applying federal law.
Impact of the Supreme Court Ruling on Employee Benefit Plans:
By holding that Section 3 of DOMA is unconstitutional, the Court’s decision means that same-sex couples legally wed under state law now must be treated as spouses under the US tax code, ERISA, and more than 1,000 other federal laws. The ruling may require extensive revision to, among other things, retirement plan documents, health plan documents, COBRA and FMLA policies, and an employer’s income tax withholding and employment tax payroll practices.
Some of the changes include:
1. Modifying Tax Treatment of Health Coverage. Before the ruling, the cost of a same-sex spouse’s benefits had to be treated as imputed income for federal income tax purposes if the individual did not qualify as a qualifying relative under Code Section 105(b). After the ruling, employees will no longer be required to pay federal income taxes on the cost of same-sex spouse health coverage in states that recognize same-sex marriages.
2. Modifying COBRA Continuation Practices. Before the ruling, a domestic partner could not qualify as a federally recognized spouse, even if state law were to recognize a same-sex domestic partner as an employee’s spouse. A same-sex spouse, even if covered under the group health plan, was not considered to be a qualified beneficiary and did not have independent COBRA election rights even if a qualifying event occurred. After the ruling, a same-sex spouse will be able to elect COBRA benefits upon any qualifying event in states recognizing same-sex marriages. This will include divorce and legal separation.
3. Modifying Administration of Cafeteria Plans. Before the ruling, entering into a same-sex marriage or terminating a same-sex marriage did not constitute a qualifying event that would permit an employee to make a mid-year election change under the employer’s cafeteria plan. After the ruling, these events will be recognized as qualifying events that permit mid-year employee election changes in states that recognize same-sex marriage.
4. Modifying Surviving Spouse Annuities and Death Benefits under Retirement Plans. Before the ruling, a same-sex spouse could not receive an annuity or death benefit under a qualified retirement plan regulated by federal law that precluded him or her from being a “spouse”. After the ruling, same-sex spouses can receive surviving spouse annuities or death benefits in those states that recognize same-sex marriage.
5. Spousal Consents to 401(k) Plan Beneficiary Designations. If an employer requires spousal consent to the designation of a beneficiary other than a spouse, a same-sex spouse’s consent is required in states that recognize same-sex marriages.
6. Providing Benefits under Self-Funded Health Plans. Before the ruling, if an employer offered spousal coverage, an employer was not required to offer coverage to those who entered into same sex marriages. After the ruling, an employer must provide current coverage to same-sex spouse under the same terms as heterosexual spouses in states that recognize same sex marriages.
7. Modify Employer Payroll Practices. Before the ruling, same sex spouses were not recognized as spouses for income tax filing purposes. After the ruling, employers should allow employees to amend Form W-4 to change withholding in states that recognize same sex marriages. Depending when the ruling is effective, employers may have to amend Form W-2s for previous years for employees who enter into same sex marriages in previous years.
8. Amend Family and Medical Leave Act Procedures. Before the ruling, same sex spouses were not considered a family member and employees were not eligible for leave to care for ill same-sex spouses. After the ruling, employers must extend rights to employees with respect to their same sex spouses in those states that recognize same sex marriages.
When is the Ruling Effective?
The ruling takes effect immediately (possibly even retroactively). If marital status affects the delivery of benefits to an employee’s same-sex spouse or that spouse’s child, employers may need to amend the plan’s “spouse” definition; reprogram tax reporting systems; and update enrollment forms, distribution election packages, tax notices, beneficiary designation forms, SPDs, and the like. Other steps may involve filing refund claims for taxes paid on the value of same-sex spouses’ health care coverage, revisiting domestic partner policies, and evaluating whether DOMA “workarounds” adopted in the past are still needed to achieve HR objectives.
What is Left to be Determined?
Because there are many questions unanswered by the ruling, it is anticipated that federal government will clarify how and when the ruling decision will apply. For example, if an employee enters into a same-sex marriage in one state but then moves to another state that does not recognize same-sex marriages, will he or she be afforded the federal benefits and protections? Also, does the decision apply only to prospective same-sex marriages or will it apply retroactively? For now, it is recommended to apply the decision in all states that recognize same-sex marriages and to all employees that are currently in same-sex marriages or enter into same-sex marriages in the future in those states.