United States: Governmental Plans: Moving Forward After The Obergefell Decision

NOTE: This bulletin is tailored for government retirement systems and government plan administrators.  There are significant differences in the impact of the Supreme Court's holding in Obergefell on plans covered by the Employee Retirement Income Security Act (ERISA).  If you have an ERISA-covered plan, please see our bulletin for private sector plans here.

Background

On June 26, 2015, the U.S. Supreme Court issued its monumental decision in the case of Obergefell v. Hodges, finding that same-sex couples have the legal right to marry in all U.S. jurisdictions and that states must recognize same-sex marriages performed in other states.  As a result of Obergefell, all governmental plan administrators must recognize same-sex spouses.  Because the Supreme Court partially based Obergefell on the U.S. Constitution's Equal Protection Clause, it appears that governmental employers and plans can no longer make distinctions between opposite-sex and same-sex married couples.  This will require all governmental employers and plans to review employment policies and employee benefit plans to ensure that all married couples are treated equally.  Given the enormity of this decision, we want to identify specific areas of concern for governmental plan administrators and provide some preliminary recommendations.  Governmental plan administrators considering immediate changes to their benefit plans will want to take these issues into consideration. 

The Obergefell decision follows the Supreme Court's decision in United States v. Windsor, in which the Court struck down section 3 of the Defense of Marriage Act (DOMA), which - for federal law purposes - limited the terms "marriage" and "spouse" to opposite-sex persons.  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.  As a result, many governmental plans did not implement full recognition of same-sex spouses for purposes of spousal benefits due to state law bans on same-sex marriage in the state where the plan is located.  Those plans must now revisit all provisions that make distinctions between opposite-sex and same-sex spouses and, we believe, eliminate those differences.

Governmental Retirement Plans Considerations

Many governmental retirement plans contain design features that will need to be reviewed, and likely amended, to comply with Obergefell.  Governmental retirement plans should already be in compliance with plan qualification requirements under the Internal Revenue Code following Windsor.  This would include requirements related to the treatment of eligible rollover distributions to same-sex spouses under IRC Sec. 401(a)(31), the treatment of minimum required distributions for same-sex spouses under IRC Sec. 401(a)(9), and the testing of survivor benefits for same-sex spouses under IRC Sec. 415(b).

The Obergefell decision will now impact state level eligibility and benefit plan designs that are not governed by the qualification requirements of the Internal Revenue Code.  Following Obergefell, impacted plan features likely include:

  • Survivor Benefits: Survivor benefits provided to spouses must be amended to provide the same treatment to opposite-sex and same-sex spouses.
  • Death Benefits:  Forms of death benefits provided to "surviving spouses" (both optional and automatic) must include both opposite-sex and same-sex spouses.
  • Beneficiary Provisions: The treatment of beneficiary designations, changes, and revocations must be the same for same-sex spouses and opposite-sex spouses.  Any provisions providing benefits to surviving spouses in the absence of or in lieu of a beneficiary must include same-sex spouses.
  • Qualified Domestic Relations Orders (QDROs):  Governmental plans that accept QDROs will be required to recognize and administer domestic relations orders issued in divorces of same-sex spouses.

Governmental Health and Welfare Plans

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 governmental 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, governmental employers located in states that recognized same-sex marriage and that, therefore, extended health and welfare benefits to same sex spouses, health and welfare benefit plan administration has largely been identical for both state and federal income tax purposes.  However, if a governmental employer provided same-sex spouses with health coverage (perhaps through domestic partner benefits) 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).

Obergefell now requires all states, including the District of Columbia and U.S. territories, to recognize same-sex marriages.  Therefore, all states will be required to treat same-sex and opposite-sex spouses identically, and the state law impact on coverage for same sex-spouses should now follow the tax treatment of opposite-sex spouses.

Are Employers Now Required to Offer Same-Sex Spouses Health and Welfare Coverage?

In Obergefell, the Supreme Court relied on the Fourteenth Amendment to find that state laws prohibiting same-sex marriage was unconstitutional.  State and local governments are subject to the Fourteenth Amendment, so we believe that governmental plans are now required to treat same-sex spouses the same as opposite-sex spouses for all federal and state law purposes. For governmental plan administrators that have not yet extended same-sex spousal coverage under their health and welfare plans, the time may be ripe to consider amending these plan provisions.

Additional Considerations

Domestic Partner Benefits

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?  For example, if a previously unrecognized same-sex spouse was denied a death benefit because the plan did not recognize the marriage, does the plan have to go back and pay the death benefit if the plan participant died prior to the Obergefell decision?  How far back must a plan go with respect to these benefits?  Similarly, if a plan refused to recognize a QDRO of a divorcing same-sex couple that was ordered prior to the Obergefell decision, must it now recognize that QDRO, or will it only have to recognize QDROs for same-sex divorcing couples that are ordered after the date of the Obergefell decision?

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 14, 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).  While we think this is a reasonable approach, it could still be challenged in federal court by same-sex spouses claiming that the Constitution requires retroactive recognition of their marriage to their wedding date.  Moreover, 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 governmental 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 governmental 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.

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