Defense of Marriage Act Found Unconstitutional: Implications for Benefit Plan Sponsors
July 17, 2013
As previously reported here, on June 26, 2013, the Supreme Court, in U.S. v. Windsor, found Section 3 of the Federal Defense of Marriage Act (DOMA), unconstitutional. That part of DOMA stated that only persons of the opposite sex could be recognized as “spouses” and as “married” for purposes of Federal law.
Federal laws impacted include provisions of the Internal Revenue Code and ERISA regulating employer-sponsored benefit plans. As a result of the decision, the term “spouse” will include a same-sex spouse residing in a state where such marriages are legal, including the New England states.
Until we receive guidance from the IRS and other Federal agencies, we cannot determine the full implications of the Windsor decision. A likely area of confusion and controversy involves employees who were married to same-sex partners in states that recognize same-sex marriages, but now reside in states that do not recognize such marriages. Section 2 of DOMA provides that states do not have to recognize same-sex marriages validly formed in other states. The Supreme Court did not review that DOMA provision. It is unclear for employee benefit plan purposes and Federal tax purposes what state law will govern – residency, state of employment, or some other factor. Will a plan need to decide on a case-by-case or participant-by-participant basis? Employers with employees in multiple states may face significant costs and administrative burdens until guidance is issued.
Plan sponsors will need to review their plan documents and practices to determine if amendments are required, especially if the definition of “spouse” is limited to those in heterosexual marriages. This definition will need to be changed, although the timing of such amendments are uncertain at this point. A key issue, not directly addressed by the Supreme Court, is whether any changes have to be made retroactively; plans have been operating since 1996 in accordance with DOMA. In most situations, court decisions apply retroactively. Retroactivity issues include, for example, possible claims for retroactive surviving spouse benefits and possible claims for tax refunds on taxes paid on imputed income. Guidance should come from the Internal Revenue Service and/or Department of Labor on this “retroactivity” issue. However, usually decisions in cases like this are retroactive.
Here are some specific areas that the Windsor decision implicate:
• Joint and Survivor Annuity and Related Rules. A same-sex spouse is now entitled to a 50% survivor annuity (or 75% survivor annuity protection if elected by the participant) under ERISA, unless spousal consent is obtained. Similarly, a same-sex spouse is now entitled to pre-retirement survivor annuity protection under ERISA. The distribution requirements under qualified plans, specifically Section 401(a)(9) of the Internal Revenue Code, treat spouses (and now, same-sex spouses) more liberally.
• 401(k) and Other Profit Sharing Plans-Beneficiary. A same-sex spouse in a 401(k) or profit sharing plan under ERISA will be entitled to the entire account on the death of the participant, unless the spouse consents to a different beneficiary.
• Hardship Distributions. Plans will be required to recognize same-sex spouses for the purpose of hardship distribution provisions that allow such distributions for the medical expenses, tuition, or funeral expenses of a “spouse.”
• Rollovers. Previously, a same-sex spouse could only rollover a death benefit to an inherited IRA as a non-spouse beneficiary. Now, a same-sex spouse is subject to more liberal rules allowing a spouse to rollover a distribution following the participant’s death to the spouse’s own IRA or other plan account.
• Loans. If a loan to a participant requires the consent of the participant’s spouse (usually only in pension plans), the same-sex spouse must consent to the loan.
• QDROs. Previously, a same-sex spouse could not receive rights to the participant’s plan benefit as an “alternate payee” under a qualified domestic relations order, usually issued in the context of divorce proceedings. Now, same-sex spouses can obtain an interest in the participant’s benefit through a QDRO.
• Imputation of Income on Coverage. Previously, plans providing coverage for (non-dependent) same-sex spouses were required to impute taxable income equal to the value of that coverage. That income has also been subject to FICA taxation at the employer and employee level. As a result of the Windsor case, same-sex spouses may be covered on a tax-free basis to the same extent as a same-sex spouse. It is likely that employers and employees will file for tax refunds relating to the previous taxation of such benefits, raising the “retroactivity” issue.
• Cafeteria Plans. Similarly, employees may now use pre-tax dollars to pay for health coverage and expense reimbursement for same-sex spouses through a cafeteria plan. It is unclear, however, whether the change in the definition of “spouse” may be treated as a change in status that allows a change in a cafeteria plan election outside of open enrollment. Hopefully, guidance on this issue will be forthcoming in the near future.
• COBRA. Previously, a same-sex spouse was not entitled to spousal COBRA rights. Now, the full panoply of COBRA rights apply to same sex spouses in the event of termination of employment or divorce. A same-sex spouse also now has special enrollment rights under HIPAA, such as when such spouse loses coverage under another plan.
Plan sponsors need to give immediate attention to their benefit plans. A plan sponsor of a pension or 401(k) plan must have procedures in place if, for example, a participant with a same-sex spouse applies for a pension benefit or dies. Employers must consider the scope of the decision, the definitions currently in their plans, their employees in same-sex marriages and the states in which they work and reside, and various issues relating to the effective date and implementation of the decision. Employers will also need to pay attention to guidance expected from the various Federal agencies. We will update you as we learn more.
If you have any questions about the issues addressed here, please contact William J. Keenan, Jr. at firstname.lastname@example.org or Lissa J. Paris at email@example.com. We hope to see you at our September breakfast where we will discuss DOMA and ACA issues.