Under Section 3 of the federal Defense of Marriage Act (DOMA):
In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, 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.
This past June 26, the United States Supreme Court, in a 5-4 decision written by Justice Kennedy, held in United States v. Windsor, __ U.S. __, 2013 WL 3196928 (2013), that Section 3 “is unconstitutional as a deprivation of the liberty of the person protected by the Fifth Amendment of the Constitution.” The decision involved the denial by the Internal Revenue Service (IRS), pursuant to Section 3, of the federal estate-tax marital deduction for amounts passing to the surviving spouse in a same-sex marriage. As a result of the Court’s striking down Section 3, the marital deduction became available to the decedent’s estate. Although Windsor did not involve any employee benefit plan, its holding presents many issues for sponsors and administrators of benefit plans subject to ERISA and the Internal Revenue Code (Code).
Before Windsor, some employers chose to follow the DOMA definition of “spouse” when dealing with domestic partners and same-sex spouses under their employee benefit plans and programs, thereby sidestepping these issues. However, more and more employers in the years before and after DOMA was passed have extended benefits to employees and their families, regardless of whether those family units were designated as “traditional.” Coverage arrangements for stepchildren and grandchildren have also required careful planning and documentation. Employers have been addressing these issues by extending benefits to redefined family-member groups, amending plans to incorporate those groups and to ensure that benefits are available under the terms of the plans and administering plans and programs to benefit all eligible groups.
This WorkCite will provide a brief overview of the issues that employers faced in the pre-Windsor era in dealing with the provision of benefits to the domestic partners or same-sex spouses of their employees. While the ruling in Windsor removes the immediate impediment, the void is filled with as many questions as answers, as is often the case. Those issues facing employers in the post-Windsor era along with some answers will be outlined and discussed. In the coming weeks, look for further information in WorkCite articles as IRS, the Department of Labor (DOL) and other federal agencies respond to the Windsor ruling with much-needed guidance.
Employee Benefits Issues under DOMA before Windsor
Group Health Plans
Under Code Sections 105 and 106, and in accordance with Section 3 of DOMA, employer payments for group health plan benefits, either directly or through insurance, for an employee, the employee’s opposite-sex spouse, and the employee’s dependents have generally been excluded from the employee’s income. In addition, an employee has been able to exclude from income amounts contributed to a Code Section 125 cafeteria plan for premiums covering these same individuals. To receive this favorable tax treatment, IRS regulations have provided that an individual is an employee’s dependent if the individual meets the definition of “dependent” under Code Section 152 without regard to the income threshold of that section.
The IRS has stated (in a private letter ruling) that because of DOMA, while a domestic partner (or same-sex spouse) is not the employee’s spouse under federal law, such a person may be the employee’s dependent if the requirements of Section 152 are met. In order for a same-sex spouse or domestic partner to be an employee’s dependent for purposes of group health plan coverage, the domestic partner or same-sex spouse must meet the requirements of a “qualifying relative” under Section 152(d). If the domestic partner or same-sex spouse is an employee’s dependent under Section 152(d), the net value of the health coverage provided will not be included in the employee’s taxable income and will not be subject to FICA taxes. In addition, the employee’s share of premiums for health coverage may be deducted from the employee’s pay on a pre-tax basis.
If the domestic partner or same-sex spouse did not qualify as a Section 152 dependent, the employer could provide coverage, but the value of the coverage had to be reported as imputed income to the employee. Also, premiums for coverage of the domestic partner or same-sex spouse could not be paid on a pre-tax basis. In addition, amounts deferred by the employee, or contributed by the employer, into a flexible spending account (FSA) or a health savings account (HSA) and the account balance in an employer-provided health reimbursement arrangement (HRA) could not be used for qualifying medical expenses for domestic partners or same-sex spouses who did not qualify as Section 152 dependents. COBRA notices were not required for domestic partners and same-sex spouses covered at the time the employee had a qualifying event because they were not “qualified beneficiaries” under DOMA.
Non-Health Welfare Plans
Other welfare benefits, such as life insurance or accident insurance, generally do not have the tax implications that attach to group health plans. However, there are many administrative issues for plans where the employer wished to extend spousal benefits to same-sex couples. First, the plan document should state that same-sex spouses are to be treated as spouses for all purposes under the plan to ensure that surviving spouse benefits are administered correctly. Also, although an employee could complete a beneficiary designation in favor of his or her same-sex spouse, any additional advantages extended to the surviving spouse could be lost without specific plan language and procedures for administration.
Qualified Retirement Plans
Under DOMA, all qualified retirement plans had to interpret “spouse” in accordance with the traditional definition required by Section 3 – unless the plan sponsor had taken specific steps to amend the plan documents and to coordinate plan administration to include same-sex couples. Even under plans that have not been amended to be more inclusive, employees could name a same-sex partner or spouse as beneficiary. However, that generally fell short of full coverage for spouses, especially under defined benefit plans. In order to ensure comparable treatment for same-sex spouses, the plan documents had to be amended to provide parallel provisions guaranteeing spousal benefits to same-sex spouses.
Post-Windsor Considerations for Plan Sponsors
After the Windsor ruling, there is no longer a definition of “marriage” or “spouse” for federal-law purposes. These terms will now, as before DOMA was enacted, have to be defined for federal purposes according to applicable state law. The provisions of the Code, ERISA and the Affordable Care Act, to name just a few federal statutes, and regulations thereunder, will be affected by the ruling.
Employers should start now with an assessment of their benefit plans and programs to determine what changes may be required in this post-Windsor era. Many questions immediately arise.
Is Windsor retroactive?
Windsor certainly has retroactive effect for Edith Windsor’s claim to recoup federal estate taxes paid after the death of her spouse, Thea Spyer, as a result of the marital deduction now being allowed. The decision appears to invalidate DOMA retroactive to 1996, the date of enactment. Given the reach of DOMA (over 1,000 federal statutes referencing marital or spousal status), retroactive application across the board may be impractical if not impossible. For both employers and individuals, further guidance is required to enable them to deal with many practical considerations. For example:
- Will DOL and IRS guidance allow same-sex spouse to apply for survivor benefits under a retirement plan in cases where the employee died five years ago and was treated as a single participant under the plan when he retired?
- Must employers correct tax records relating to imputed income, at least for open years?
- If employers correct tax records for open years, will same-sex couples be required to amend their income tax returns, file as “married,” and potentially be subject to additional tax on account of the so-called “marriage penalty”?
What state law will govern who is a “spouse” for federal purposes?
If a same-sex couple were married in a state recognizing same-sex marriage and continues to live in that state, then there is no question that the marriage will be recognized for federal law purposes. However, if such couple move to a state that does not permit same-sex marriage, it is unclear whether the law of the state in which the marriage was performed, or the law of the state in which the couple are domiciled, will govern for federal-law purposes. Currently, some federal statutes look to the state of domicile and other statutes look to the state (or foreign jurisdiction) where the marriage was performed. It is also unclear what happens if one member of the couple moves to a state that does not permit same-sex marriage but the other member remains in the state where the marriage was performed. (These questions were not presented in Windsor, which involved a marriage performed in a jurisdiction (Canada) that permits same-sex marriage and the couple, at the time of the decedent’s death, resided in New York, which recognized their marriage as valid.)
In the above example, must the state that does not permit same-sex marriage nevertheless recognize a marriage validly performed in a state that does permit such a marriage? Under the Full Faith and Credit Clause in Article IV, Section 1 of the United States Constitution, “[f]ull faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state.” The Supreme Court has recognized limits on the Full Faith and Credit Clause, however:
And in the case of statutes, the extrastate effect of which Congress has not prescribed, as it may under the constitutional provision, we think the conclusion is unavoidable that the full faith and credit clause does not require one state to substitute for its own statute, applicable to persons and events within it, the conflicting statute of another state, even though that statute is of controlling force in the courts of the state of its enactment with respect to the same persons and events.
Pacific Employers Insurance Co. v. Industrial Accident Comm’n., 306 U.S. 493, 502 (1939).
Moreover, Section 2 of DOMA, which was not at issue in Windsor and therefore remains in effect, provides that:
No State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship.
How does state law affect the definition of “spouse” under employer-sponsored benefit plans?
For private employers, most benefit plans are governed by federal law. Without Section 3 of DOMA, the definition of “spouse” will presumably include all legally-married couples (marriages now defined under state law). Other state laws attempting to limit same-sex rights would generally be preempted by ERISA or other federal laws. Guidance from the IRS and DOL will be required to understand fully the impact of Windsor on most benefit plans.
State and local government plans may still be subject to state-law restrictions (same-sex marriage bans or state “mini-DOMA” laws); however, a judge in Michigan has already ruled that Michigan’s ban on coverage for same-sex partners of state employees is unconstitutional. Although there may be at least a theoretical basis for not extending spousal benefits under ERISA-covered benefit plans based on state laws that still prohibit same-sex marriage, it is increasingly unlikely that those provisions could withstand judicial scrutiny in federal court.
Which states currently allow same-sex marriage or civil unions?
Marriage licenses are issued to same-sex couples in 13 states (California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington) and the District of Columbia. The California same-sex marriage law was reinstated following the Supreme Court decision in Perry v. Hollingsworth, announced the same day as Windsor.
Five states also recognize same-sex civil unions, providing state-level spousal rights to same-sex couples (Colorado, Hawaii, Illinois, New Jersey and Rhode Island; civil unions will no longer be available in Rhode Island on Aug. 1, 2013, when that state’s same-sex marriage law goes into effect).
Three states grant nearly all state-level spousal rights to same-sex couples through registered domestic partnerships (Nevada, Oregon and Washington; effective June 30, 2014, domestic partnerships in Washington will be limited to couples age 62 or older). Three states (Hawaii, Maine and Wisconsin) and the District of Columbia provide some state-level spousal rights to unmarried couples through registered domestic partnerships.
What is the status of civil unions and domestic partnerships under benefit plans following Windsor?
It seems clear at this point that valid same-sex marriages must be recognized under most benefit plans governed by federal law. The extent to which civil unions must be treated for federal-law purposes the same as marriages is as yet unknown.
At this time, an employer can still choose to be more inclusive and treat civil union partners and domestic partnerships as covered groups under its employee benefit plans. However, at the least, the spousal tax benefits and treatment as the spouse under plan terms that may be automatically granted to same-sex spouses after Windsor would not necessarily accrue to civil partners and would undoubtedly not apply to domestic partners.
What steps should employers be taking now to prepare plans to be compliant, both in form and administration?
This is a good time to make a list of all employee benefit plans and fringe benefit programs to determine which of the plans and programs will be impacted by the overruling of Section 3 of DOMA. All plans that provide spousal benefits or provide coverage to or for spouses should be reviewed to determine:
- What is the current definition of “spouse”?
- How does such definition need to be changed to achieve the plan sponsor’s plan design goals and to be compliant with Windsor?
- What changes are required to summary plan descriptions (SPDs) and other employee communication pieces?
- What changes are required to enrollment forms and other plan administration forms (both paper and online)?
- What should a policy for documenting eligibility for all spousal benefits provide?
- How and when will the employer stop imputing income for benefits provided to same-sex spouses and start allowing pre-tax contributions, reimbursements and survivor benefits?
- What changes are required as to withholding and reporting obligations?
As mentioned earlier, IRS and DOL guidance is definitely in order for employers to accomplish these tasks successfully, especially as to cessation of imputing income and as to withholding and reporting obligations. But planning now can make the process easier to implement once guidance is published.
What specific provisions should be reviewed by employers to determine the impact of including same-sex spouses under benefit plans and programs?
Again, the most obvious impact of Windsor will be the treatment of all same-sex spouses as dependents under Section 152, with the immediate tax implications for group health plans and related tax-advantaged arrangements. However, there are also significant issues for non-health welfare plans and especially retirement plans. These are listed briefly here.
- Group health plans If an employee is legally married, then his/her same-sex spouse will be treated as a spouse under Section 152. As a result, the employer’s group health plan will need to make the following adjustments: As required, amend plan documents, SPDs and employee communications to reflect the definition of “spouse” to include a spouse of either gender in a legally-recognized marriage. Stop imputing tax on the net value of benefits for same-sex spouses (there may still be state tax law issues, depending on the jurisdiction). Stop paying (and reporting) additional payroll taxes on the imputed income on benefits for same-sex spouses. Allow pre-tax premium payments for coverage of same-sex spouses. Offer COBRA coverage to same-sex spouses on the same basis as opposite-sex spouses. Provide HIPAA special enrollment rights to same-sex spouses on the same basis as opposite-sex spouses. Allow for tax-free reimbursement of qualified medical expenses for same-sex spouses under FSAs, HSAs and HRAs on the same basis as opposite-sex spouses.
- As required, amend plan documents, SPDs and employee communications to reflect the definition of “spouse” to include a spouse of either gender in a legally-recognized marriage.
- Stop imputing tax on the net value of benefits for same-sex spouses (there may still be state tax law issues, depending on the jurisdiction).
- Stop paying (and reporting) additional payroll taxes on the imputed income on benefits for same-sex spouses.
- Allow pre-tax premium payments for coverage of same-sex spouses.
- Offer COBRA coverage to same-sex spouses on the same basis as opposite-sex spouses.
- Provide HIPAA special enrollment rights to same-sex spouses on the same basis as opposite-sex spouses.
- Allow for tax-free reimbursement of qualified medical expenses for same-sex spouses under FSAs, HSAs and HRAs on the same basis as opposite-sex spouses.
- Non-health welfare plans For all other welfare plans (life insurance, disability, severance, etc.), the employer should determine the extent to which spousal benefits are offered and make the following adjustments:As required, amend plan documents, SPDs and employee communications to reflect the definition of “spouse” to include a spouse of either gender in a legally-recognized marriage. Review and amend beneficiary designation forms to comply with the amended plan provisions.
- As required, amend plan documents, SPDs and employee communications to reflect the definition of “spouse” to include a spouse of either gender in a legally-recognized marriage.
- Review and amend beneficiary designation forms to comply with the amended plan provisions.
- Qualified retirement plans
- Offering qualified joint and survivor annuities and qualified optional survivor annuities for surviving spouses must be offered to all eligible spouses, regardless of gender.
- Same-sex spouses will be entitled to any pre-retirement survivor annuity benefits offered under a plan on the same basis as opposite-sex spouses (unless waived per regulations).
- Same-sex spouses who are beneficiaries of deceased participants will be eligible to elect a rollover distribution to an individual retirement account and will have the right to defer plan distributions to age 70½.
- Hardship distributions for medical, tuition or funeral expenses of a same-sex spouse must now be available.
- Spousal consent, where required (for example, plan loans or non-spouse beneficiary designations) will apply to same-sex spouses.
- Qualified domestic relations orders will apply to same-sex spouses (post-divorce benefits may be difficult to claim as long as difficulties remain in some jurisdictions with granting divorces to same-sex couples).
- Other benefits issues In addition to those benefits already listed here, the following plans and programs may need to be adjusted to accommodate same-sex spouses in accordance with the Windsor ruling: Family Medical Leave Act: Leave may be granted for the care of a same-sex spouse. Group-term life insurance: The cost of group-term life insurance (up to $2,000 coverage) for an employee’s same-sex spouse will be tax-free. Reduced tuition: An educational organization can provide tax-favored tuition reduction for spouses. Employee discounts: Discounts on property or services of the employer available to same-sex spouses of employees will not be taxed if not taxable to employees or their opposite-sex spouses. No-additional-cost services: The exclusion from income of the value of services normally provided by the employer will be available to employees and same-sex spouses. Dependent care assistance: Funds may be used for the care of a dependent same-sex spouse.
- Family Medical Leave Act: Leave may be granted for the care of a same-sex spouse.
- Group-term life insurance: The cost of group-term life insurance (up to $2,000 coverage) for an employee’s same-sex spouse will be tax-free.
- Reduced tuition: An educational organization can provide tax-favored tuition reduction for spouses.
- Employee discounts: Discounts on property or services of the employer available to same-sex spouses of employees will not be taxed if not taxable to employees or their opposite-sex spouses.
- No-additional-cost services: The exclusion from income of the value of services normally provided by the employer will be available to employees and same-sex spouses.
- Dependent care assistance: Funds may be used for the care of a dependent same-sex spouse.
Employers and benefits practitioners are waiting for guidance from the IRS, the DOL and other agencies as to the many benefit-plan issues presented by Windsor. There will be no quick answers or quick fixes, but employers should start immediately to assess their plans and procedures that need revision in order to be able to implement guidance as it is issued.
For further information, please contact either of the authors of this article, Sally Doubet King and Larry R. Goldstein, or any other member of McGuireWoods’ employee benefits team.