The U.S. Supreme Court's decision in United States v. Windsor, issued two weeks ago, held that a portion of the Defense of Marriage Act (DOMA) was unconstitutional. This decision will affect individuals, employers, and certain businesses. In this Legal News Alert, we provide an overview of the decision, and discuss its effects on:
- Employer and individual taxes
- Gift and estate taxes
- Employer policies
- Employee benefit plans
- Health care providers
- Insurance companies
There is still a fair amount of uncertainty about the effect of the decision. For example, we are waiting to hear what the IRS and Department of Labor will say about the decision's effect on their respective areas of jurisdiction. Despite the uncertainty, individuals, employers, and businesses should be aware that there may be changes ahead for their tax planning, employee policies and benefit plans, and business strategies.
Overview
What is DOMA?
DOMA is a 1996 federal law that had two main parts:
(1) For purposes of applying federal laws, it defined "marriage" as a union between only a man and a woman, and defined "spouse" as only a person of the opposite-sex.
(2) It said that a state is not required to recognize a same-sex marriage entered into in another state. This was a departure from the typical "full faith and credit" rules which normally required a state to recognize a marriage if it was validly entered into in another state.
What did the decision do?
The Windsor decision held that the first part of DOMA
— that marriage can only be between a man and a woman under
federal law — was unconstitutional.
It did not, however, strike down the second part of DOMA. As a result, states that do not recognize same-sex marriages are still permitted to disregard same-sex marriages entered into in other states. The fact that this portion of DOMA still survives will present some challenges for couples that move from a state that recognizes their same-sex marriage to a state that does not, as discussed in some of the remaining portions of this newsletter.
How will the federal government respond to the
decision?
That remains to be seen. For federal laws and
regulations, the Obama administration and federal agencies
operating under the executive branch have announced that they will
move quickly to implement the implications of the Windsor
decision to the fullest and most uniform extent possible.
At this point, we expect the agencies to at least revert to their pre-DOMA positions. For example, before the 1996 enactment of DOMA, the IRS generally defined the term "spouse" and "marriage" in accordance with state law. We expect the IRS to once again accept state law definitions of "spouse" and "marriage." If so, same-sex couples in states that legally recognize their marriages may be considered "spouses" and "married" for federal income tax purposes. It is possible that the federal agencies may go beyond this and adopt a rule recognizing, for federal law purposes, any valid same-sex marriage, regardless of where the couple resides.
The Windsor decision itself limits its holding to "lawful marriages." The majority of states do not recognize same-sex marriage (see the next question for a list of those states which allow same-sex marriages). A lawful marriage does not appear to include civil unions and registered domestic partnerships (or common law marriages in states where common law marriages are not recognized). It is not clear whether a couple who was legally married in a state is considered married when they move to a state that does not recognize the "marriage."
Which states allow same-sex marriages?
The District of Columbia and the following 13 states
issue marriage licenses to same-sex couples: California,
Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts,
Minnesota (effective August 1, 2013), New Hampshire, New York,
Rhode Island (effective August 1, 2013), Vermont, and
Washington.
Illinois and New Jersey are currently considering legislative measures that would grant marital recognition to same-sex couples. There are also legal battles in states such as Pennsylvania, Illinois, and Michigan seeking to overturn the states' bans on same-sex marriage. It is possible that within the year, more than half of the country's population will live in a state that legally recognizes same-sex marriages.
As discussed above, states that fail to permit same-sex marriages, or even honor the validity of same-sex marriages originated in one of the states listed above, may continue to do so. Accordingly, at the state level and presumably at the federal level, a same-sex marriage is considered valid only if recognized by the state in which the couple resides. Whether the federal government will adopt a more expansive rule — one that, for federal law purposes, continues to recognize a same-sex marriage that was validly entered into at the time of marriage, no matter where the couple ultimately resides — remains to be seen.
Effect on Employer and Individual Taxes
What does the decision mean to employers?
The Internal Revenue Code excludes amounts that an employer pays
toward medical, dental, and vision benefits for an employee and the
employee's spouse and dependents from the employee's
taxable income as a tax-free fringe benefit. Prior to the
Windsor decision, employers that provide these benefits to
employees' "same-sex partners" (that is, partners who
are not "spouses" as defined in DOMA) were required to
include the fair market value of the benefits as taxable income to
the employee, unless the partner otherwise qualifies as the
employee's "dependent" as defined for federal income
tax purposes (generally, this is unlikely).
Employers are required to withhold FICA (Social Security and Medicare) taxes from their employees' taxable FICA wages, including the value of the taxable benefits discussed above. Employers must also pay their share of FICA taxes, as well as Federal Unemployment Tax Act taxes.
We expect the Windsor decision to result in an exclusion from the employee's taxable income of the value of employer-provided benefits for a non-dependent same-sex partner who is considered married to the employee for federal tax purposes. Presumably, the IRS will provide guidance to employers on how to make any appropriate adjustments in 2013 for reporting (Forms 941, 940, W-2s) and FICA and income tax withholding purposes. We expect some employers to begin to exclude such value; others will wait for IRS guidance before changing their current payroll practices.
With respect to 2010, 2011, and 2012, it may be possible for employers to claim a refund of their share of the FICA taxes paid (and for the FICA taxes withheld from an employee assuming the employee consents to his or her inclusion in the claim) on the value of the same-sex partner benefit coverage. Taxpayers generally must file FICA refund claims for 2010 by April 15, 2014. Therefore, we expect most employers to wait for IRS guidance before filing FICA tax refund claims. Obviously, if such guidance is not forthcoming in a timely manner, it will be necessary to file refund claims before the statute of limitations for doing so expires.
Employers may also consider issuing amended Form W-2s showing less taxable income, allowing employees to file amended returns, possibly claiming tax refunds.
What does the decision mean for legally married same-sex
individual taxpayers?
Filing Status
When two individuals are considered married for federal
tax purposes, filing a joint return may result in lower combined
federal income taxes than if the couple was unmarried, particularly
if one individual earns most or all of the income (generally the
larger the income and/or the larger the disparity in income, the
more savings). Filing a joint return, however, also may result in
significantly higher combined federal income taxes (the so-called
"marriage penalty") than if the two individuals had
remained single taxpayers, particularly if both individuals earn
approximately the same amount of income (and, in general, the
larger the incomes, the larger the marriage penalty). Note that
married taxpayers, with limited exceptions, cannot choose to file
as single taxpayers. Same-sex couples now considered married under
applicable state law may actually see a significant increase in
their combined federal income taxes and may be subject to
retroactive IRS income tax assessments on audit (or if they choose
to re-file their income tax returns for prior tax years).
Same-sex married couples should seek competent professional tax advice on whether they should (1) file amended income tax returns, and if so, what special disclosures need to be made, (2) provide their employer a new Form W-4 claiming married status and/or changing their number of exemptions/amount of income tax withholding, and (3) join their employer's FICA tax refund claim if asked to do so, and if not, whether to pursue a FICA tax refund claim on their own. Same-sex married couples should seek such advice soon, particularly with respect to 2009 income tax returns that were filed in 2010 with a valid extension of time to file (as the statute of limitations will expire on October 15, 2013 at the latest).
Tax-Free Employer Health Coverage
When two individuals are considered married for federal tax
purposes, one individual can receive certain benefits from the
other's employer tax-free. The most common examples are health
care coverage and tax-free reimbursements from flexible spending
account (FSA) plans. Prior to the Windsor decision,
employers that provide these benefits to employees'
"same-sex partners" (that is, partners who were not
considered "spouses" under DOMA) were required to include
the fair market value of the benefits as taxable income to the
employee, unless the partner otherwise qualifies as the
employee's "dependent" as defined for federal income
tax purposes (generally, this is unlikely). Employees also may be
able to file amended returns (even without an amended Form W-2)
with proper disclosures. Again, same-sex married couples should
seek competent professional tax advice.
Divorce Provisions
When two individuals are considered married for federal
tax purposes, they can also be considered divorced. Certain
court-ordered payments to a spouse or ex-spouse can qualify as
deductible alimony. A transfer of property incident to a divorce is
also generally considered a tax-free gift rather than a taxable
transaction. In contrast, transfers between unmarried individuals
are generally not deductible, and they may be treated as either a
taxable transaction or a gift, and if a gift, maybe subject to gift
taxes or loss of estate/gift tax exemption amounts.
Individual Retirement Account (IRA) and Qualified
Retirement Plans
When two individuals are considered married for federal
tax purposes and one individual dies, the survivor can roll over
IRA and qualified retirement plan balances inherited from the
decedent into the survivor's own IRA. The survivor can then
delay taking annual required minimum distributions (RMDs) from the
rollover IRA until after he or she turns 70½. In contrast,
when a non-spouse inherits an IRA or a qualified retirement plan
balance, he or she may have to start taking RMDs sooner and in
larger amounts, resulting in less tax deferral benefits. Additional
information about the effect of the decision on gift and estate
taxes and employee benefit plans is included below.
Other
There are many other provisions in the Internal Revenue Code that
may apply, some beneficial, such as the availability of the
innocent spouse protections, and some detrimental, such as the
related-party rules that disallow losses on transactions between
two individuals considered married for federal income tax
purposes.
Effect on Gift and Estate Taxes
How does the decision affect a same-sex couple's
ability to make use of the federal estate tax provisions available
to married couples?
As a result of the decision, same-sex couples that are legally
married in their state of residence are now able to take advantage
of various tax benefits available to spouses for purposes of the
federal gift and estate tax. The federal estate tax is imposed at
an individual's death on the transfer of assets that exceed the
decedent's available estate tax exemption (for 2013, each
individual has an estate tax exemption amount of $5.25 million).
With proper estate planning, a married couple can make use of two
exemptions, allowing the transfer of up to $10.5 million without
any estate tax.
As a general matter, all assets that pass to a surviving spouse or certain trusts for the benefit of a surviving spouse qualify for an unlimited marital deduction for estate tax purposes. This allows a married couple to defer all estate tax until the surviving spouse's death (rather than estate tax being due at the first death). The Windsor decision expands the definition of spouse to include the survivor of a same-sex couple where the couple was legally married in their state of residence.
The decision also allows legally married same-sex couples to make use of the estate tax portability provisions. When a spouse dies without making full use of his or her estate tax exemption, the surviving spouse has the ability (subject to certain restrictions) to add the deceased spouse's unused exemption to the surviving spouse's exemption at the time of the surviving spouse's death.
How does the decision affect a same-sex couple's
existing estate planning documents?
For same-sex couples that are legally married in their
state of residence, it is important to review existing estate
planning documents (e.g., wills, revocable trusts). It is likely
that current estate planning documents will not make full use of
the tax advantages available to married couples.
As discussed above, it is important to keep in mind that the Windsor decision invalidated only one provision of DOMA. A second provision of DOMA gives individual states the option not to recognize same-sex marriages that are legal in other states. If a same-sex couple is legally married in a state that recognizes same-sex marriage but then moves to another state that does not recognize same-sex marriage, the couple will need to re-evaluate their estate plans. As a matter of state law, their marriage may no longer be recognized. This may cause them to lose some of the tax advantages discussed above, which may necessitate a restructuring of the estate plan.
What lifetime gifting arrangements are now available to
legally married same-sex couples as a result of the
Windsor decision?
While the federal estate tax imposes a tax on the
transfer of assets at an individual's death, the federal gift
tax imposes a tax on the transfer of assets during a person's
lifetime. In 2013, each individual has a lifetime gift tax
exemption of $5.25 million. Any lifetime gifts that use an
individual's gift tax exemption will reduce the amount of the
estate tax exemption available at the individual's death.
As with the estate tax, the gift tax also includes an unlimited marital deduction for gifts made to a spouse, either directly or into certain trusts, which allows for the tax-free transfer of assets between spouses. Legally married same-sex couples can now make unlimited transfers to one another without being subject to gift tax. If one spouse has significantly more assets than the other, same-sex couples can now equalize their estates with lifetime asset transfers to ensure that both individuals have sufficient assets to use their respective estate tax exemptions at death. Previously, larger transfers between same-sex couples could potentially trigger gift tax consequences, which complicated household budgeting if paychecks were deposited into joint bank accounts or if one spouse earned more income and paid the bulk of the household expenses.
Additionally, same-sex couples that are legally married can now make a "gift-splitting" election that is available only to spouses on their annual gift tax returns. The gift tax authorizes tax-free gifts up to the "annual exclusion amount" (for 2013, this amount is $14,000 per donor, per recipient). By gift-splitting, gifts made by one spouse can be treated as being made one-half by each spouse. This allows married couples to take advantage of each spouse's separate annual exclusion amount, effectively allowing a married couple to give up to $28,000 per recipient, per year without incurring gift tax.
Are there retirement account tax advantages available to
same-sex couples as a result of the decision?
Certain retirement account income tax advantages are
available only to a surviving spouse who is the designated
beneficiary on a decedent's retirement accounts. A surviving
spouse — and no one else — has the unique option to
roll over the deceased spouse's retirement accounts into the
surviving spouse's own name and postpone required minimum
distributions until the year after the surviving spouse attains age
70½. In many cases, this allows longer deferral of income
tax recognition for withdrawals from traditional IRAs or other
tax-deferred retirement accounts.
Does the decision have any effect on capital gains paid
by same-sex couples?
For legally married same-sex couples that live in
community property states that recognize same-sex marriage (as of
the time of this writing, these states are California and
Washington), assets held by the couple will qualify for a
"double step-up" in basis at the time of the first
spouse's death.
In community property states, each spouse is treated as owning one-half of all community property assets of the married couple, regardless of how the assets are titled. Therefore, when one spouse dies, one-half of the assets is treated as being owned by the deceased spouse, and one-half is treated as being owned by the surviving spouse.
Under the Internal Revenue Code, the basis of assets owned by a decedent is adjusted to the value of the assets on the decedent's date of death. This effectively eliminates any pre-death capital gains attributable to the asset's appreciation in value from the time of acquisition through the date of death.
The Internal Revenue Code gives special treatment to community property assets, allowing a "double step-up" in basis of community property assets owned by spouses. Not only does the deceased spouse's share of the community property assets receive a step-up in basis, but the surviving spouse's share of the assets also gets stepped-up. For many couples, this can result in substantial savings on capital gains taxes if assets have significantly appreciated in value. As a result of the Windsor decision, this tax advantage will now be available to legally married same-sex couples in community property states.
Effect on Employer Policies
What effect does the decision have on employers and
their employment-related policies?
Any federal benefits and laws that apply to an
employee's spouse will now extend to same-sex spouses in
legally recognized marriages. There are more than 1,100 federal
laws and regulations that apply to married couples. Employers will
need to review their employment policies, particularly as they
relate to family and medical leave, recognition of bi-national
same-sex marital relationships, taxes and employee salary, and
employee benefits. While the Supreme Court's decision in
Windsor is certain to affect employers in states such as
New York and Massachusetts, where same-sex marriage is legal, the
implications for employers in states like Illinois, Florida, or
Wisconsin is less certain. Still, in light of Windsor and
the rapidly changing legal landscape for LGBT couples, it is
strongly encouraged that employers review their policies and
benefits packages to ensure they are in compliance with applicable
state and federal law.
As a starting point, employers may wish to survey their workforce, to find out if any employees have been married in states that recognize same-sex marriage. For reasons discussed below, employers also may wish to find out if any employees have entered into a civil union or registered domestic partnership.
What kind of changes should employers expect to make in
light of the Windsor decision?
Most immediately, employers should make changes and
updates to any family and medical leave benefits, welfare benefits
they offer employees who are married, as well as qualified
retirement plans. (See the discussion under Effect on Employee
Benefit Plans below for more information.)
Employers should discuss required changes with employment and benefits counsel, and implement any recommended changes quickly. Additionally, because the Windsor decision does not extend to couples in civil unions or domestic partnerships, employers should make an effort to determine which of its LGBT employees are in valid marriages and which are in another form of recognized union.
When does the Windsor decision go into
effect?
Immediately. Justice Kennedy, writing the opinion, did
not indicate that there was a deadline by which employers or
federal agencies were required to abide by its implications, which,
in essence, means that employers are required to comply with
federal law immediately. Furthermore, because DOMA was found
unconstitutional, it is arguable that the law, when passed in 1996,
was never constitutional to begin with. Therefore, it is possible
that employers never had a right to restrict federally mandated
rights and benefits to heterosexual employees without also
providing such benefits to validly married same-sex couples.
Employers who provided equal rights and benefits to employees prior
to the Windsor decision may be insulated from claims by
employees in same-sex marriages, while employers who have yet to
offer such benefits may risk claims for past benefits due.
Employers should consult counsel to determine whether they are at
risk of possible claims by employees in same-sex marriages denied
equal benefits and rights prior to the Windsor
decision.
I am an employer in a state that recognizes same-sex
marriage. Do I need to do anything to comply with the
Windsor decision?
Yes, there are a number of federal laws and regulations
that will now apply to employees who have a valid same-sex
marriage. Many of these issues are addressed in greater detail
below. As an employer with employees in valid same-sex
relationships, you are now required to comply with all applicable
federal employment mandates, including family and medical leave,
retirement benefits, recognition of bi-national same-sex marital
relationships, and other such benefits. If your policies do not
already provide equal benefits for your employees in valid same-sex
marriages, you will need to comply with applicable laws and
regulations quickly.
I have employees in a state that recognizes civil unions
or domestic partnerships between persons of the same-sex, but not
marriages. Does the Windsor decision require that I take
any action?
This is a difficult question that is still being
resolved, but the speed with which you enact any changes will
depend on whether you employ a worker that has a valid marriage
performed elsewhere. While employees who are in civil unions or
domestic partnerships (or some other form of recognized
relationship that is not marriage) are not affected by the
Windsor decision, there are some states in which a
marriage performed elsewhere will be recognized even if the state
itself does not issue marriage licenses to same-sex couples, such
as New Mexico. Still other states will recognize marriages
performed elsewhere as a civil union, rather than a marriage, such
as Illinois. For any applicable state laws, the state in which the
employee works for you will likely determine whether state benefits
are available to non-married couples in some other form of same-sex
union.
For federal laws and regulations, the Obama administration and federal agencies operating under the executive branch have announced that they will move quickly to implement the implications of the Windsor decision to the fullest and most uniform extent possible. We expect that this may mean that even if the state in which an employer operates does not recognize same-sex marriages, employees in a valid same-sex marriage performed elsewhere are entitled to most rights and benefits of their heterosexual counterparts, and employers will be required to provide at least some applicable federal benefits. As described in more detail below, this includes certain family and medical leave, health benefits, marital recognition for bi-national same-sex couples, and certain retirement benefits. On the other hand, if you have no employees with valid same-sex marriages, you will not be required to treat other forms of same-sex relationships the same as marriage. Still, it is advisable that employers update policies accordingly to treat heterosexual and LGBT employees on equal footing, to the extent possible under the law of your state, as there will likely be additional regulatory changes and litigation leading to equalization of relationship status recognition at the state and federal levels in the relatively near future.
I employ employees in a state that does not provide any
type of same-sex relationship recognition, such as civil unions,
domestic partnership, or marriage. Do I need to do anything to
comply with the Windsor decision?
If you have employees who entered into valid same-sex marriages in
another state or country, you may be required to make some changes
to your policies. Although at this point in time it is unclear how
far-reaching the Windsor decision is, the Obama
administration and federal agencies operating under the direction
of the executive branch have almost uniformly indicated that they
will implement the effects of the decision swiftly and uniformly to
the greatest extent possible. We expect employers operating in
states that do not legally recognize any form of same-sex union
will need to update at least some policies and practices as they
relate to federally mandated rights and benefits. The most
important of these changes is to employer-provided health insurance
benefits, retirement plans, and family and medical leave. Employers
in such states should consult counsel to discuss which policies and
benefits will require changes in light of Windsor.
I am an employer with operations and employees in
multiple states, some of which permit same-sex marriages, others of
which do not. How does the Windsor decision affect
me?
The implications of Windsor are immediate with
respect to any federally mandated employee benefits and policies in
states that recognize same-sex marriages. For companies operating
in multiple states with varying laws, but with operations in at
least one state that recognizes same-sex marriage, implementation
of uniform policies and benefits across the company, to the extent
possible, is encouraged. Thus, you may wish to offer any leave,
immigration, or other employee benefits to LGBT employees in valid
same-sex marriages on equal terms with those in opposite-sex
marriages. As more states allow same-sex marriages, more employees
will be eligible for benefits under federal law, so uniform
policies nationwide may be best, not only for convenience but also
for if, and when, a certain state's law may change that will
provide employees there with greater benefits under federal law.
Employers with operations in multiple states should consult
employment counsel to ensure compliance with Windsor,
particularly as it relates to employer-provided employee benefit
plans.
What about the Employment Non-Discrimination Act (ENDA)
currently pending in Congress? Does Windsor change
anything?
ENDA is the proposed federal legislation explicitly
prohibiting discrimination in employment on the basis of sexual
orientation and gender identity. While various versions of the
legislation have been floated in Congress since 2007, ENDA has not
yet become law. Windsor likely has no effect ahead of
ENDA's passage except in the provision of federally mandated
rights and benefits for employees in same-sex marriages. However,
the legislation has recently seen new signs of life in Congress,
and many states and local governments have taken action on their
own to pass laws prohibiting employment discrimination on the basis
of sexual orientation (and, in some cases, gender identity). In
conjunction with updating existing policies and practices
post-Windsor, employers would be wise to also update any
equal employment opportunity (EEO) statements or policies —
including no-harassment and anti-retaliation policies — to
include sexual orientation and gender identity. Furthermore,
employers operating in multiple states would be advised to make
uniform their EEO, no-harassment, and anti-retaliation policies to
be inclusive of sexual orientation and gender identity to ensure
all employees are treated equally, no matter where they live or
work.
What types of leave am I now required to provide my
employees in same-sex marriages?
Employees in same-sex marriages are now entitled to equal leave
benefits under the Family and Medical Leave Act (FMLA) — but
only if the state in which the couple resides recognizes the
marriage. Prior to DOMA's enactment, the Department of Labor
issued a rule stating that a "spouse," for purposes of
FMLA leave, means "a husband or wife as defined or recognized
under State law for purposes of marriage in the State where the
employee resides." 29 C.F.R. Sec. 825.102. While DOMA
previously superseded this rule, post-Windsor the rule is
once again in effect. Thus, FMLA policies maintained by an employer
must now permit an LGBT employee with a seriously ill spouse to
take the same leave that is required for heterosexual employees if
that employee resides in a state that recognizes same-sex marriages
(e.g., New York or California) or gives validity to marriages
performed in other states (e.g., New Mexico). To the extent you
have employees residing in states that recognize same-sex marriages
(even if you do not operate in such a state) and your current FMLA
policy does not already permit equal leave for those employees, you
should update such policies immediately. It is also recommended
that you do not differentiate between employees who are married,
and those who are in some other form of recognized union (civil
unions or domestic partnerships).
It is also important for employers to remember that the Department of Labor defines "son or daughter" for purposes of qualifying FMLA leave as any child that an employee intends to share in parenting with his or her same-sex partner, including a biological or adopted child. This is true even if that child is not adopted by the employee seeking to exercise FMLA leave, since many same-sex couples do not engage in dual-parent adoption, either by law or by choice, and whether or not the couple is in a validly recognized marriage.
I have employees who are in bi-national same-sex
marriages. What affect does Windsor have?
A bi-national same-sex couple is one in which one spouse
is a U.S. citizen and one is from another country, but is not
already a naturalized citizen. For the couple, this means that the
non-citizen spouse will be recognized as the legal spouse of a U.S.
citizen and is eligible for permanent residency and citizenship on
this basis. It also means that such couples will be automatically
included in any comprehensive immigration reform that may come out
of U.S. Congress.
There is no immediate impact for employers. However, if an employer is required to conduct a re-verification of an employee's work authorization at any time (the completion of a new Form I-9), it should be noted that a formerly non-citizen employee in a same-sex marriage with a U.S. citizen may present different documentation at the time of re-verification indicating permanent residency status or citizenship. Employers cannot use this information as a basis to discriminate against the employee, and should treat the employee in the same manner it would a non-citizen employee in an opposite-sex marriage who was married and later required to re-verify employment eligibility.
While re-verification is only required by the Department of Homeland Security under limited circumstances, employees wishing to update their own employment authorization verification to reflect any change in residency or citizenship status may do so at any time. However, outside of these circumstances, employers should not request or require any employees in bi-national same-sex marriages to do so.
Effect on Employee Benefit Plans
What effect will the decision have on qualified
retirement plans (401(k), pension and 403(b))?
All spousal rights under those plans will now apply to
same-sex spouses. For example, if a participant in a 401(k) plan
filed a beneficiary designation form naming his children as his
beneficiaries, and did not get his same-sex spouse's consent to
that beneficiary designation because it previously was not required
under federal law, then the beneficiary designation form is now
ineffective due to the absence of the spouse's consent. As
another example, if a participant in a pension plan dies prior to
his annuity starting date, then that participant's same-sex
spouse would be entitled to the preretirement surviving
spouse's benefit under the plan.
Because neither ERISA nor the Internal Revenue Code defines who is considered a "spouse," until we receive guidance from the IRS and DOL, we believe that qualified retirement plans should adopt a "state of residence rule." Under the "state of residence rule," whether an individual is married is determined based on their state of residence. As a reminder, many states do not recognize same-sex marriages, even if they were validly entered into in those states that allow them. So, for example, an employee who was validly married to a same-sex spouse in Maryland, would not be considered married if she moves to Wisconsin.
Can an employer amend its qualified retirement plans to
limit spousal rights to opposite-sex spouses only?
Generally not. Many spousal rights under qualified
retirement plans are mandated by federal law. Now that same-sex
spouses are recognized under federal law, they must also be
recognized as spouses under an employer's retirement plans when
those federally mandated rights apply. If an employer's
retirement plans provide spousal rights or benefits above and
beyond what the federal law requires, the employer could amend the
plan to limit those rights to opposite-sex spouses only.
What effect will the decision have on an employer's
welfare plans?
It depends on how "spouse" is defined in those
plans. Unlike qualified retirement plans, federal law does not
mandate that employers cover spouses under their welfare plans.
Accordingly, if an employer's welfare plans define a
"spouse" to mean an opposite-sex spouse only, then the
decision has no effect on such plans. On the other hand, if an
employer's welfare plans do not have such a definition, then
the result is that same-sex spouses are now afforded the same
rights under such welfare plans as are opposite-sex spouses.
If an employer already allows same-sex spouses to
participate in its health plans, but have been reporting and tax
the value of such coverage as compensation, can the employer stop
taxing coverage now?
Yes. While some employers may wish to wait until IRS
guidance is issued, an employer can stop reporting the value of the
same-sex spouse's coverage as compensation to the employee.
When the employer issues the Form W-2 for 2013, it does not have to
report any additional compensation related to the health plan
coverage for the entire year. As a result, the employer probably
will have over-withheld taxes on the employee's wages to date,
but the employee should be able to get a credit for that when they
file their 2013 tax return.
Is the decision considered a "change in
status" event or HIPAA special enrollment event allowing
employees with same-sex spouses to make election changes under an
employer's welfare plans?
No. We do not believe the decision — which
recognizes same-sex marriages under federal law — is
considered a change in status event or a HIPAA special enrollment
event. The IRS may provide guidance about that soon. If an employee
gets married to a same-sex spouse in the future, however, that
would be considered a HIPAA special enrollment event and a change
in status event for which changes in coverage elections could be
made.
Does the decision have an effect on medical flexible
spending accounts (FSA)?
Yes. The same-sex spouse's unreimbursed medical
expenses can now be submitted for reimbursement to the
employee's FSA. Medical expenses incurred during the current
plan year would be eligible for reimbursement. As discussed above,
because the decision is not a "change in status" event,
an employee should not be permitted to increase his or her
contributions to the flexible spending account to account for the
same-sex spouse's expenses, absent IRS guidance to the
contrary.
What effect will the decision have on an employer's
non-qualified plans?
It depends on how "spouse" is defined in those
plans, if at all. If the plan defines as a "spouse" as an
opposite-sex spouse only, then the decision have no effect on such
plan. However, if the plan does not have a definition of
"spouse," then the employer will need to decide how to
interpret that term or amend the plan to make it clear. Unlike
qualified retirement plans, nonqualified plans are not mandated by
law to provide spousal rights. So, it is up to the employer to
determine which spouses it wishes to provide rights to under the
plan.
Does the decision affect non-married same-sex domestic
partners?
No, the decision has no effect on unmarried, same-sex
domestic partners. The issues with respect to providing benefits to
such partners remain the same as before.
Effect on Health Care Providers
How does the decision affect health care
providers?
While the decision affects insurance and tax issues
associated with health care (discussed above), the decision does
not create any additional duties for health care providers. Since
many private health care providers have covered same-sex couples
for many years, providers should handle coverage for partners of
federal employees or families who are covered by any federally
funded health insurance programs in the same manner and rely upon
the insurance information provided by patients. It also should be
noted that topics such as medical power of attorney and other
issues related to decisions regarding patient care continue to be
governed under state law and were not altered by the DOMA
decision.
How will the decision effect health care reform?
By making insurance more affordable and readily available
for same-sex spouses, the number of individuals seeking to access
coverage under the health care exchanges (scheduled to go into
effect in 2014) may decrease. In addition, there may be a slight
reduction in Medicare and Medicaid spending since married, same-sex
couples' eligibility will be evaluated based upon their joint
income level.
Effect on Insurance Companies
What effect does the decision have on insurance
companies?
Because insurance is generally regulated on a state-by-state,
rather than federal, basis, insurers in states which already permit
same-sex marriage are generally already obligated to treat same-sex
and opposite-sex couples equally. However, because of the change in
federal tax treatment of married same-sex couples which results
from the Windsor decision, insurers now have a great
opportunity to reach out to the LGBT market with tax-advantaged
life insurance and annuity products. Windsor allows
married same-sex couples to take advantage of the exemption from
estate taxation for married couples under federal tax law; as a
result, insurance products with death benefits —
predominately life insurance and annuities — are now
substantially more attractive to same-sex couples who are legally
married because the vast majority of life insurance and annuity
death benefits can be received by the surviving spouse tax-free. As
a result, life insurers should ensure that their agents are aware
that Windsor may dramatically impact the financial
planning needs of same-sex couples, including the advisability of
life insurance and annuities. Both agents and life insurers will
need to incorporate the new tax treatment of married same-sex
couples in life insurance and annuity suitability recommendations
as well as sales and promotional materials.
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.