Same-Sex Marriages and Employee Benefit Plans
Kegler Brown E-mployment Alert October 10, 2013
On June 26, 2013, the Supreme Court of the United States ruled in the case titled United States v. Windsor that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional. The purpose of this newsletter is to discuss the impact of the Supreme Court’s decision on employee benefit plans.
Section 3 of DOMA provided that, in any federal statute, the term “marriage” means a legal union between one man and one woman as husband and wife, and that “spouse” refers only to a person of the opposite sex who is a husband or a wife. The Supreme Court concluded that DOMA is unconstitutional because it “undermines both the public and private significance of state-sanctioned same-sex marriages” and because the purpose and effect of DOMA is to “disparage and to injure those whom the State, by its marriage laws, sought to protect.”
This decision by the Supreme Court revolved around estate taxes. However, there are more than 1,300 federal laws that reference a “spouse” or “marriage,” including the Internal Revenue Code, ERISA, COBRA and FMLA. Therefore, the Supreme Court’s decision will have far reaching impact on federal laws and benefit plans governed by federal laws.
On August 29, 2013, the United States Department of Treasury and the Internal Revenue Service ruled that, effective September 16, 2013, same-sex couples legally married in jurisdictions that recognized their marriages will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriages or a jurisdiction that does not recognize same-sex marriages (such as Ohio). Under this ruling, same sex couples will be treated as married for all federal tax purposes. Accordingly, where marriage is a factor, including filing status, claiming personal dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, claiming an earned income tax credit or child tax credit, this ruling will apply.
On September 18, 2013, the United States Department of Labor issued guidance relating to employee benefit plans on the definition of “spouse” and “marriage” under ERISA. In this guidance, the DOL stated that the term “spouse” will be read to refer to any individuals who are lawfully married under any state law, including individuals married to a person of the same sex who were legally married in a state that recognizes such marriages, but who are domiciled in a state that does not recognize such marriages. To this extent, this is consistent with the Internal Revenue Services’ position. However, the DOL further states that the term “marriage” will be read to include a same-sex marriage that is legally recognized as marriage under any state law.
The Department of Labor stated that, for these purposes, the term “state” means any state of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, Wake Island, the Northern Mariana Islands, and any other territory or possession of the United States and any foreign jurisdiction having the legal authority to sanction marriages. Obviously, this is a very broad interpretation by the Department of Labor.
In connection with an employer’s employee benefit plans, an employee that is married legally in a state that recognizes same-sex marriages should be treated as married notwithstanding that the employee now resides in a state (such as Ohio) that does not recognize same-sex marriages. It is important to note, however, that the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law. Employers offering retirement, health and welfare benefit plans will need to review plan documentation, administrative practices and compliance processes in order to determine that they are appropriately treating individuals in same-sex marriages. Among other things, the employer should obtain information from its employees to determine whether or not the employees are married consistent with the IRS and DOL directives. In this regard, if the employer’s system treats domestic partners and civil unions the same as same-sex marriages, the information will need to be separated and identified appropriately.
Employers should review their plan documents to determine what, if any, changes need to be made with respect to the definition of “marriage” or “spouse.” This would include qualified plan documents, health and welfare documents, and summary plan descriptions for the same. In this regard, COBRA and HIPAA procedures should be addressed, including HIPAA special enrollment, as should qualified domestic relation orders procedures. It might be prudent for an employer to communicate with its employees about how this new law impacts HSA limits.
Employers should review and update their plan operation and payroll systems to treat same sex marriages consistent with opposite-sex marriages and reflect the same in updated policies and procedures. In this regard, payroll practices need to be addressed. What was otherwise not tax-free health and fringe benefits to a same-sex spouse could now be tax-free health and a fringe benefit to the extent the Internal Revenue Code extends such benefits to spouses in general. In this regard, employers should no longer be required to pay employment taxes on the value of imputed income with respect to such employees.
FMLA policies need to be reviewed. The DOL updated its guidance in FMLA to reflect the Supreme Court’s decision on DOMA, as well. In this update, the DOL confirmed that the laws of the state in which the employee resides determine whether a person in a same-sex marriage is to be considered a spouse. The DOL suggested that it may extend FMLA to all legally married same sex couples regardless of their place of residency, but they have not done so to date.
We are awaiting further guidance from the governmental agencies on many aspects of these developments, including, but not limited to, an employer’s seeking a refund on payroll taxes due to the imputed income issues discussed above. How far back the employer can seek such refunds, etc. needs to be clarified. We do know that the IRS will provide us with additional guidance and that they will issue a special administrative procedure for an employer to file claims for refunds for excess social security taxes and Medicare taxes paid on same-sex spouses’ benefits. The IRS allows retroactive recognition of legal same-sex marriages for individuals to amend federal tax returns, including for benefit-related deductions within the three-year statutory window. However, we are looking for further guidance on retroactivity as it relates to employee benefit plans. Therefore, employer exposure to liability for past ERISA policies and practices remains unsettled.
Ultimately, we urge you to seek counsel to review current ERISA benefit plans for compliance with DOMA and to revise those plans to minimize risk for future liability. We also encourage you to understand what other employment practice and policies might be impacted by DOMA and what steps you should take to amend or revise these policies.
If recognition of same-sex marriages for benefit purposes is ultimately deemed to be retroactive, there may be steps that can be taken now to minimize this exposure, absent any current guidance. For example, updating beneficiary designations for qualified retirement plans would be prudent to both avoid confusion and contention in the future.
Suffice it to say that the Windsor case and the subsequent rulings necessitate taking action to comply with the new law and to avoid liability.