On June 26, the U.S. Supreme Court decided the case of
United States v. Windsor, holding that Section 3 of the
Defense of Marriage Act ("DOMA") is unconstitutional (the
"Windsor Decision").
Section 3 of DOMA provides that for purposes of federal law,
"the word 'marriage' means only a legal union between
one man and one woman as husband and wife, and the word
'spouse' refers only to a person of the opposite sex who is
a husband or a wife." 1 U.S.C. Section 7.
Before the Windsor Decision, Section 3 of DOMA required that all
provisions of federal law, including the Employee Retirement Income
Security Act ("ERISA") and the Internal Revenue Code
("Code") (and underlying regulations), that refer to
spouse or marriage use the DOMA definitions. As a result, under
DOMA, same-sex spouses were not required to receive (and in some
cases were prohibited from receiving) the same benefit plan
protections that applied to opposite-sex spouses. The holding that
Section 3 of DOMA is unconstitutional means that this Section is no
longer the law and, therefore, same-sex lawfully married spouses
are now to be treated in the same manner as opposite-sex spouses
for benefit plan purposes.
Impact on Definition of "Spouse"
The Windsor Decision expressly applies only to persons who are
"lawfully married." Because most states do not recognize
same-sex marriage, however, it is not clear what the Windsor
Decision means for same-sex couples who, although they were married
in a state that recognizes same-sex marriage, reside in another
state that recognizes only opposite-sex marriages. In fact, Section
2 of DOMA (which was not mentioned in the Windsor Decision and
remains in effect) allows states to disregard same-sex marriages
performed in other states. The scope of same-sex marriages that are
"lawful" and covered by the Windsor Decision is therefore
not clear.
While it seems apparent that same-sex spouses living in a state
that recognizes such marriages are entitled to equality with
opposite-sex married couples, a same-sex couple residing in a state
that does not recognize their marriage in another state may not be
eligible for such equality. Nor is the treatment of
state-recognized civil unions (sometimes called domestic
partnerships) under the Windsor Decision clear at this point.
Whether they are lawful marriages for purposes of the Windsor
Decision despite their different designation may depend on the
terms of each state's law regarding civil unions. It also may
depend upon whether federal agencies choose to step in and define
when a same-sex marriage is lawful for federal law purposes. This
may be accomplished, for example, by federal regulation that
recognizes same-sex marriages for benefits purposes based on the
state of marriage celebration, regardless of whether the state of
domicile—if different—would recognize such a
marriage.
To the extent that same-sex spouses are lawfully married, however,
employers need to consider what benefits and protections must be
extended to same-sex spouses under their employee benefit plans.
The following discussion of benefit plan provisions highlights the
issues that affect same-sex spouses who are lawfully married but is
not intended to be an exhaustive list.
Qualified Retirement Plan Benefits and
Issues
Qualified Joint and Survivor Annuity. Defined
benefit pension plans and certain defined contribution plans are
required to offer retirement benefits to married participants in
the form of a qualified joint and survivor annuity
("QJSA") unless the spouse consents to a different form
of payment. The QJSA rules protect the spouse by limiting a
participant's ability to eliminate a spousal benefit. Prior to
the Windsor Decision, neither ERISA nor the Code required that such
plans offer a QJSA to same-sex spouses. After the Windsor Decision,
same-sex spouses are entitled to all of the protections of the QJSA
requirements.
Qualified Pre-Retirement Survivor Annuities.
Defined benefit pension plans and certain defined contribution
plans are required to offer a qualified pre-retirement survivor
annuity ("QPSA") to surviving spouses unless the spouse
consents to a waiver of the benefit. The QPSA rules protect the
spouse if a participant dies prior to the commencement of
retirement benefits. Prior to the Windsor Decision, neither ERISA
nor the Code required that such plans offer a QPSA to same-sex
spouses. After the Windsor Decision, same-sex spouses are entitled
to all of the protections of the QPSA requirements.
Spousal Consent. In order to protect the
spouse's right to the QJSA and QPSA, the written consent of a
participant's spouse is required in order for certain actions
to take place under a retirement plan. For example, the written
consent of a spouse is generally required to (i) name a designated
beneficiary other than the spouse (under certain defined
contribution plans), (ii) waive the qualified annuity form of
payments described above, and (iii) use the participant's
accrued benefit as security for a loan from the plan. Prior to the
Windsor Decision, these spousal consent requirements did not apply
to same-sex spouses. After the Windsor Decision, the spousal
consent requirements apply to same-sex spouses.
Qualified Domestic Relations Order. Qualified
retirement plans are required to recognize a spouse's right
under a qualified domestic relations order ("QDRO"). A
QDRO is a court order that creates a right for certain persons
(including spouses) to receive payments or benefits when a plan
participant gets a divorce. Prior to the Windsor Decision, a court
order that provided retirement benefits to a same-sex spouse could
not be recognized by a retirement plan. After the Windsor Decision,
the QDRO rules apply to same-sex spouses.
Required Minimum Distributions. Subject to certain
requirements, qualified retirement plans can allow a deceased
participant's spouse to defer payment of the plan death benefit
until the plan participant would have attained age 70 ½.
Prior to the Windsor Decision, same-sex spouses were treated the
same as a non-spouse beneficiary, which required them to begin
payment within a year of the participant's death and receive
any death benefits within five years or over their life expectancy.
After the Windsor Decision, the spousal required minimum
distribution rules apply to same-sex spouses.
Rollover Distributions. Qualified retirement plans
are required to allow a deceased participant's spouse to roll
over an eligible rollover distribution to an eligible retirement
plan. Prior to the Windsor Decision, same-sex spouses were
precluded from utilizing this rollover feature and were permitted
to roll over eligible rollover distributions only to an inherited
Individual Retirement Account. After the Windsor Decision, the
spousal rollover distribution rules apply to same-sex
spouses.
Health and Welfare Plan Benefits and Issues
Requirement to Offer Coverage. There is no federal
law that requires health or welfare benefits to be offered to
spouses. Therefore, the Windsor Decision does not necessarily mean
that such benefits must be extended. However, state insurance laws
and nondiscrimination laws may affect whether or not an employer
extends health and welfare benefits to same-sex spouses. The
"play or pay" employer mandate requires "large
employers" to offer health coverage to full-time employees and
the employee's children (but not spouses) or pay a tax penalty
starting in 2015 (following the recently announced one-year delay
of the effective date). Under proposed regulations, children
include stepchildren. Thus, in 2015 there may be a requirement to
offer health coverage to the children of a same-sex spouse, but not
to the same-sex spouse.
Tax Implications—Employer Premiums. Under
the Code, employer-provided health benefits received by employees
and their spouses and dependents generally are excluded from the
taxable income of the employees. These excluded amounts include the
employer's portion of the premiums paid for coverage for the
employees and their spouses and dependents. Prior to the Windsor
Decision, health benefits provided to a same-sex spouse (who was
not the employee's tax dependent) did not qualify for the
exclusion from income, and the value of benefits provided to a
same-sex spouse were required to be included in the income of the
employee. After the Windsor Decision, the value of health benefits
provided to a same-sex spouse is excluded from the income of the
employee.
Tax Implications—Pre-Tax Benefits. Employee
premiums for health benefits for employees and their spouses and
dependents generally are permitted to be deducted from an
employee's pay on a pre-tax basis through a cafeteria plan.
Prior to the Windsor Decision, health plan premiums for coverage
for a same-sex spouse (who was not the employee's tax
dependent) either had to be deducted on an after-tax basis, or
imputed income had to be allocated to the employee equal to the
value of such coverage. After the Windsor Decision, health plan
premiums for coverage of same-sex spouses may be deducted on a
pre-tax basis.
Tax Implications—Spending Account Plans.
Health care flexible spending accounts, health reimbursement
accounts, and health savings accounts are accounts that can be used
to pay out-of-pocket health care expenses incurred by employees and
their spouses and dependents. Prior to the Windsor Decision,
out-of-pocket expenses incurred by a same-sex spouse (who was not
the employee's tax dependent) were not permitted to be paid
from such accounts. After the Windsor Decision, out-of-pocket
expenses incurred by a same-sex spouse are permitted to be paid
from such accounts.
COBRA Continuation Coverage and Notices. Group
health plans are required to provide COBRA notices to spouses and
to offer COBRA continuation coverage to a participant's spouse
upon the occurrence of a qualifying event that results in the
spouse losing coverage under a health plan. Prior to the Windsor
Decision, group health plans were not required to offer COBRA
continuation coverage to same-sex spouses (although some plans
voluntarily provided COBRA-like benefits to same-sex spouses and
domestic partners). After the Windsor Decision, full COBRA benefits
apply to same-sex spouses who are otherwise eligible for coverage
under the plan.
Special Enrollment Periods. Group health plans are
required to offer special enrollment rights to a participant's
spouse under the Health Insurance Portability and Accountability
Act ("HIPAA") if the participant gets married and if the
health plan allows for spousal coverage. Prior to the Windsor
Decision, group health plans were not required to offer special
enrollment rights to same-sex spouses. After the Windsor Decision,
same-sex spouses will be entitled to all of the special enrollment
provisions of HIPAA if they are otherwise eligible for coverage
under the plan.
Cafeteria Plans. Cafeteria plans are required to
provide plan participants an opportunity to change their cafeteria
plan elections when a participant gets married, dies, divorces, or
legally separates from a spouse. Cafeteria plan elections generally
are irrevocable during the year, unless there is a "change in
status event" such as a change in "legal marital
status." Prior to the Windsor Decision, a same-sex spouse was
not treated as a spouse under the change in status rules. After the
Windsor Decision, events involving a same-sex spouse will be change
in status events.
Retroactivity of the Decision
As outlined above, the Windsor Decision has many implications on
employee benefit rights going forward. It will have significant
additional implications if the decision is given
"retroactive" effect, and Jones Day is of the view that
the decision is indeed retroactive.
Is the Decision Retroactive? The Supreme Court has
made clear that at least in the civil context, full retroactivity
of judicial decisions is the rule. See Harper v. Va. Dep't
of Taxation, 509 U.S. 86, 97 (1993) ("When this Court
applies a rule of federal law to the parties before it, that rule
is the controlling interpretation of federal law and must be given
full retroactive effect in all cases still open on direct review
and as to all events, regardless of whether such events predate or
postdate our announcement of the rule"). Consequently, there
appears to be no basis for limiting the force of the Windsor
Decision, even as to events or determinations involving same-sex
spouses who were not parties to the litigation and that predate the
decision. This does not mean, however, that every benefit
determination, no matter how long ago it was made, is now subject
to reexamination. Rather, ordinary doctrines of res judicata,
statutes of limitations, and other established legal doctrines will
likely limit the degree to which past actions may be subject to
legal challenge.
Consequences of Retroactivity. It is reasonable to
assume that the Internal Revenue Service and the Department of
Labor will provide guidance on the responsibilities of employers in
connection with the retroactivity of the Windsor Decision. But
until such guidance is provided, we think these practical
principles should apply.
- It would appear that employees whose same-sex married spouses were not their tax dependents and whose taxable income was increased by the value of benefits provided to such spouses can file for income tax refunds. The right to apply for refunds can extend to employers that overpaid their share on FICA and FUTA taxes for such employees. But employers do not have to rush to do anything. The next deadline for filing employment tax refund claims to protect open years is next spring for employers who have timely filed their employment tax returns.
- For benefits that already have been paid, and were paid correctly under the law as it then stood, it is highly unlikely that employers have a current legal obligation—whether based on ERISA fiduciary principles or otherwise—to act affirmatively to unwind those payments. Instead, the practical course would be to wait for federal guidance.
- For benefits that have not yet been paid, but for which prior designations have been made that are now in legal jeopardy, a strong communications program should be provided to employees advising them of the Windsor Decision and its impact on those prior designations. (See discussion below.) As an example, assume an employee previously designated a non-spouse beneficiary to receive a pension without consent of his same-sex spouse, despite being married to such spouse at the time. The employer—as plan administrator—may well have a current duty to advise its employees of the legal changes effected by the Windsor Decision so that the prior designation (now potentially defective in light of the Windsor Decision) can be altered.
Employer Actions Needed
Communications and Processes
. All employee and participant communications (and other similar
documents or forms) and all human resource, payroll, and benefits
administration processes (manual and electronic) related to the
benefits and protections that have been extended to same-sex
spouses should be reviewed to ensure that the communications are
updated to comply with the Windsor Decision and that processes are
adjusted to account for any spousal participation and election
changes.
Plan Amendments. All plan documents that govern
benefits and protections that have been extended to same-sex
spouses should be reviewed to ensure that the plans are amended as
necessary to comply with the Windsor Decision. The definition of
"spouse" under all plan documents should also be reviewed
and appropriately updated, including removing all references to
DOMA.
Interaction with Domestic Partner Policies. To the
extent that an employer's benefit programs provide benefits and
protections for domestic partners or other persons who are not
spouses or dependents of an employee, the policies should be
reviewed and updated to reflect the change in treatment of same-sex
spouses under federal law.
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.