When the United States Supreme Court struck down the Defense of Marriage Act (DOMA) provision defining marriage under federal law as between a man and a woman, the decision had broad implications for U.S. employee benefit plans of all kinds. The Supreme Court was silent on the retroactive impact of its decision and whether there should be a transition period for compliance; however, some issues affecting current benefits appear to require immediate attention, as the decision becomes final on July 21.
Below we highlight some of the ways in which the invalidation of this section of DOMA affects plan administration and the taxation of plan benefits.
Which Marriages Must Be Recognized?
The Supreme Court ruled that the federal government could not deny equal treatment to same-sex spouses whose unions were recognized under state law. It did not find a constitutional right to same-sex marriage that must be recognized throughout the United States. Therefore, the starting point for a plan that has not voluntarily provided benefits to same-sex- spouses – and many U.S. plans have not – is to determine whether the participant was married in one of the 13 states (now including California) or the District of Columbia that recognize same-sex marriage. If not, the plan must determine whether the participant was legally married in a country such as Canada or the Netherlands that legally recognizes same-sex marriage. The court's decision did not discuss civil unions, such as those recognized in New Jersey.
If the spouses were married in and reside in a state such as Massachusetts that permits same-sex marriages, that may be all the inquiry necessary. However, if they were married in a state where they do not live now, whether they are treated as married for purposes of the Employee Retirement Income Security Act (ERISA) or the related provisions of the Internal Revenue Code may depend on whether the state where they now reside recognizes same-sex marriages performed elsewhere.
The Supreme Court did not invalidate another provision of DOMA that was not before it and does not require states to recognize these marriages performed in other jurisdictions, but some states do. For example, Edith Windsor, the plaintiff in the DOMA case, was married in Canada, and New York recognized her marriage. On the other hand, Florida passed a law prohibiting any recognition of same-sex marriages.
The Internal Revenue Service (IRS) and other federal agencies will have to determine which laws apply in this situation. The IRS typically looks to state law, but might take the position that valid same-sex marriages will be recognized for federal tax purposes no matter where performed. Pending future guidance on this point, plans may wish to consult their legal counsel if they are unsure how to handle situations in which the spouses were not married in the state or country where they now reside.
What About Domestic Partnerships and Civil Unions?
Nothing in the decision grants any new rights to this group. Providing benefits to partners in domestic partnerships and civil unions generally continues to be optional. However, state insurance laws may require their coverage in insured welfare plans.
Which Plan Practices Are Affected?
State insurance laws governing health and life insurance plans (which, unlike laws affecting pension plans and self-funded welfare plans, are generally not preempted by ERISA) may provide the applicable definition of "spouse" for those plans. In states where same-sex marriage is legal, these laws should define spouse consistently with state marriage law. Other state insurance laws may not mandate or permit these insurance benefits to be provided to same-sex spouses or partners in civil unions. This may be an area of future litigation.
Pension plans subject to the benefit requirements of ERISA and tax-qualified plans must now provide qualified joint and survivor annuities and pre-retirement survivor annuities to same-sex spouses. Same-sex- spouses may also be entitled to more valuable benefits because joint and survivor benefits are often subsidized. Plans that do not provide annuities – such as many 401(k) plans – must require the consent of a same-sex spouse before a participant can elect a non-spouse beneficiary. Plans will be required to recognize qualified domestic relations orders (QDROs) if same-sex spouses divorce.
ERISA-covered welfare and cafeteria plans providing spousal coverage will generally be required to permit same-sex spouses to elect family coverage, and Affordable Care Act (Obamacare) requirements will be applied by recognizing same-sex marriages. These plans must also permit special enrollment and mid-year changes in coverage when one of the relevant life events listed in HIPAA occurs, such as same-sex marriage, death of a same-sex spouse, etc. And a major change will occur in the taxation of health plan and cafeteria plan participation, where same-sex spouses who participate in the plan have previously been taxed on the value of coverage provided to a non-dependent same-sex spouse. Such coverage will now be provided on a pre-tax or non-taxable basis.
A further major change in the welfare benefit area is that same-sex spouses who were covered under a health plan will now be entitled to health plan continuation coverage (COBRA) when their spouse loses coverage – for example, by being laid off.
There are other provisions that will be affected. This Update highlights only some of the most significant.
Plans that currently define "spouse" as a person of the opposite sex will need to be amended. A plan that defines spouse by reference to DOMA should similarly be changed. However, a plan that makes a general reference to federal law may not require an amendment, so counsel should be consulted about required changes. Employers should also consider getting new beneficiary designations from employees in same-sex marriages, even if the plan is not specifically amended to provide for it.
While it seems clear that compliance is required going forward, since the Supreme Court found that the relevant DOMA section was always invalid, there may be retroactive claims from employees who were denied benefits in the past or are currently receiving other forms of payment. For example, defined benefit plans are not required to provide pre-retirement or post-retirement death benefits for unmarried participants, so, for example, same-sex widows or widowers might now claim that they should receive retroactive lump sums or survivor annuities.
We do not yet know whether retroactive compliance will be required, or, if it is, how far back to go. We hope that guidance applicable to private employer plans will be issued soon. A memorandum has already been issued by the U.S. Office of Personnel Management giving employees and annuitants under federal government plans 60 days from June 26 (the date of the Supreme Court decision) to make immediate changes to their health plan enrollment and giving all retirees in same-sex marriages two years from June 26 to elect any changes to their federal retirement benefit based on marital status.
There seems to be no clear requirement at this time for private employers to permit employees already in pay status to change the form of payment of their pensions as federal employees will be permitted to do. This, in fact, could be viewed as prohibited under regulations on required minimum distributions. For this kind of retroactive change, a wait-and-see-approach would be the most appropriate at this time.
There does, however, appear to be a clear opportunity to claim refunds of taxes improperly paid in the past. Employees who were taxed on their cafeteria and flexible benefit plan participation may file for refunds, so employers could be required to issue corrected forms W-2. Employers may also wish to file for refunds of FICA paid based on same-sex spouse participation in such plans.
The Canadian Experience
Same-sex marriage all across Canada has been recognized for eight years now and legislation started being amended several years before that to recognize same-sex partnerships, including pension standards legislation. In the wake of the recent U.S. Supreme Court case, Canadian companies with U.S. operations will need to turn their minds to these issues once again.
If the Canadian experience is any indication, we would expect further litigation over effective dates and implementation. For example, the 2007 decision of the Supreme Court of Canada in Canada (Attorney General) v. Hislop considered the constitutionality of the federal legislative response to its 1999 decision striking down the restrictive definition of "spouse" in the Family Law Act (Ontario). In Hislop, certain Canada Pension Plan restrictions on same-sex survivor benefits were found to be unconstitutional. Nevertheless, the Court did not grant full retroactivity of benefits to 1985, when section 15(1) (the equality rights section) of the Charter of Rights and Freedoms came into effect.
Given the number of open questions and the speed with which the federal government is moving to change its own benefits, compliance guidance for private employers is sorely needed. A threshold issue of major importance is whether to look at the law of the state in which the couple lives or the state or country in which the marriage was performed to determine whether a same-sex marriage is valid. Another threshold issue is when conforming amendments will be required to be adopted. Plan sponsors need to keep abreast of all new authority in this area.
Compliance Action Plan
Plan sponsors also need to coordinate with their legal counsel regarding plan document changes and with their recordkeepers, administrators and payroll providers to correctly implement the compliance practices that they adopt. Finally, they will also need to clearly communicate with employees to notify them of plan changes.
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.