NOTE: This bulletin is tailored for private employers who sponsor employee benefit plans subject to the Employee Retirement Income Security Act (ERISA). There are significant differences in the impact of the Supreme Court's holding in Obergefell on governmental plans. If you have a governmental plan, please see our bulletin for governmental plans here.
Background
On June 26, 2015, the U.S. Supreme Court struck down state laws banning same-sex marriage in Obergefell v. Hodges. The Court held that the Fourteenth Amendment requires states to license marriages between two people of the same sex and to recognize such marriages that have been lawfully licensed in other states. As a result, existing state laws which prohibit same-sex marriages are no longer valid, affecting employee benefit plans and labor and employment practices of employers doing business in those states.
The Obergefell decision settled a long-standing question regarding a state's obligation to recognize same-sex marriages performed in other states, which had been left unanswered by the Supreme Court's decision in United States v. Windsor. In Windsor, the Court held that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional. This holding granted same-sex spouses who were married in a state that recognized same-sex marriages, the same treatment as opposite-sex spouses for purposes of federal law. The Windsor decision however, did not address section 2 of DOMA, which allowed states to refuse to recognize same-sex marriages performed in other states, nor did it address state laws or state constitutional bans on same-sex marriages. Many employers did not implement full recognition of same-sex spouses for purposes of spousal benefits. These plans must now revisit all provisions that make distinctions between opposite-sex and same-sex spouses and determine whether those distinctions can be maintained.
Private Employer Retirement Plan Considerations
As a result of the Windsor decision, employers sponsoring retirement plans were required to afford same-sex spouses the same treatment as opposite-sex spouses under those plans for all federal tax law and ERISA purposes. This would include recognition of same-sex spouses for purposes of the death benefit and annuity provisions, requirements related to the treatment of eligible rollover distributions to same-sex spouses, the treatment of minimum required distributions for same-sex spouses, review of qualified domestic relations orders, and application of the federal income tax withholding rules. Since most of the spousal provisions under private retirement plans are governed by federal law, the impact of the Obergefell decision is largely limited to state tax withholding rate obligations on distributions.
Private Employer Health and Welfare Plans Considerations
Neither Obergefell nor Windsor addressed whether a same-sex spouse must be treated the same as an opposite-sex spouse for purposes of eligibility for health and welfare plans. However, Windsor made clear that if same-sex spouses are eligible for health, dental, vision and cafeteria plan coverage, they must be treated the same as opposite-sex spouses for all federal tax purposes. Accordingly, if a private employer offers same-sex spouse health coverage, vision or dental coverage, flexible spending account coverage, or pre-tax premium coverage under a 125 plan, then Windsor requires that the covered same-sex spouse is entitled to the same federal tax benefits as an opposite-sex spouse.
State Income Tax Issues
As a result of Windsor, for employers whose employees reside in states that recognized same-sex marriages and who extended health and welfare benefits to same-sex spouses (or who covered domestic partners who may be same-sex spouses), the plan administration has largely been identical for state and federal income tax purposes. However, for employers providing same-sex spouses with health coverage (or who covered domestic partners who may be same-sex spouses) with respect to employees residing in a state that did not recognize same-sex marriage, the employer would be required to impute state income to the employee on the value of the same-sex spouse's health coverage (even though such coverage was not taxable for federal income tax purposes).
Because Obergefell requires all states, including the District of Columbia and U.S. territories to recognize same-sex marriages, all states will be required to treat same-sex and opposite-sex spouses identically for state tax purposes. Therefore, there will no longer be any distinction between federal and state law on the treatment of same-sex spouse coverage.
Are Employers Now Required to Offer Same-Sex Spouses Health and Welfare Coverage?
Neither the federal tax code nor ERISA require employers to cover spouses, or any category of spouses, under their health and welfare plans. If an employer extends same-sex coverage to opposite-sex spouses (as most plans do), are same-sex spouses entitled to equal treatment under the law? Is it impermissible gender discrimination to offer a female employee health coverage for her male spouse, but not offer a male employee health coverage for his male spouse? We believe that these issues will be decided through the courts, particularly cases stating gender discrimination claims under Title VII of the Civil Rights Act. The decisions in Windsor and Obergefell will likely be used to bolster decisions providing for such protections in the near future. As a result, for employers that have not yet extended same-sex spousal coverage under health and welfare plans, the time may be ripe to evaluate the risk of offering coverage to only opposite-sex spouses.
Additional Considerations
Domestic Partner Coverage
For many employers, the reasons for offering domestic partner benefit coverage no longer exist. Because same-sex couples will now have the opportunity to marry in any state and have their marriages recognized in all states, some employers that currently offer same-sex domestic partner benefits are considering whether to eliminate domestic partner benefit coverage. In addition, governmental plan administrators must also now consider the ramifications of maintaining same-sex domestic partner benefits, including the risk of Fourteenth Amendment discrimination claims by opposite-sex employees who are not offered domestic partner benefit coverage. Employers considering eliminating their domestic partner benefits should carefully consider several factors including: (1) the number of employees affected; (2) cost of maintaining such coverage; and (3) whether domestic partner benefits were added to address other state or local requirements or other concerns.
Plan sponsors might determine that terminating domestic partner coverage reduces administrative complexity in plans. For example, by eliminating domestic partner benefits, a plan would not have to maintain a separate set of rules for domestic partner eligibility, which may require domestic partner affidavits and documentation to provide proof of a marriage-like relationship. Furthermore, administering mid-year status changes due to the beginning or end of a marriage is generally more straightforward than administering mid-year changes due to the beginning or end of a domestic partnership, which is often more difficult to determine. Finally, eliminating domestic partner benefits will also eliminate the need to impute income to an employee on the value of benefits provided to domestic partners so the value of those benefits can be taxed (to the extent that the domestic partner is not a tax dependent).
If the decision is made to eliminate domestic partner benefit coverage, a transition period should be established to allow affected employees the opportunity to consider all of their options for benefits coverage, which might include getting married or finding other coverage options for a domestic partner. We believe that many employers will use a one-year transition period in conjunction with the open enrollment period in 2016, resulting in the elimination of domestic partner benefits for the 2017 plan year. However, each employer will need to determine what is a reasonable transition period given its unique employee population.
Retroactivity of Obergefell Decision
An open issue that has not been decided is the effective date for employers to comply with Obergefell. In other words, what is the date upon which a same-sex marriage should be recognized? Following the Windsor decision, the Internal Revenue Service (IRS) issued guidance which required changes for plan qualification purposes to be made on a prospective basis only (see Ice Miller notice dated April 16, 2014 click here). The guidance also required employers to treat employees in same-sex marriage as though their date of marriage was effective on the date of the Windsor decision. In the absence of other guidance, a reasonable plan administrator might turn to the IRS's approach after Windsor (even if only by analogy) and set the "compliance date" for Obergefell as the date of the Court's decision (June 26, 2015). That said, since the Obergefell decision will largely affect the tax laws of those states/jurisdictions that previously did not recognize same-sex marriage, each state or jurisdiction may issue its own guidance on the timing of the implementation of the Obergefell decision (which may present a series of compliance hurdles).
While we have addressed some of the areas of concern that private employer plan administrators should be considering in light of the Obergefell decision, it is too soon to know its full implications. We will continue to monitor legal developments and advise on approaches taken by private-employer plans and employees.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
