Supreme Court’s Ruling on DOMA Requires Immediate Action by Employee Benefit Plans
The Supreme Court’s recent decision in the Windsor case—which ruled that Section 3 of the Defense of Marriage Act is unconstitutional—broadly affects retirement, health and other employee benefit plans. In this Client Alert, we consider some steps employers should consider taking immediately to assess and respond to the impact the Windsor decision will have on their employee benefit arrangements while we await appropriate guidance from federal agencies and courts.
On June 26, 2013, in U.S. v. Windsor, the Supreme Court struck down as unconstitutional Section 3 of the Defense of Marriage Act (“DOMA”), which provided that only opposite-sex marriages would be recognized as valid for federal law purposes. As a result, individuals who are spouses in a same-sex marriage that is recognized under applicable state law are considered to be married when applying federal statutes and regulations that refer to or involve marital status. Note that the Windsor decision does not require all states to recognize same-sex marriages. This means that, as stated, while Windsor held that individuals must be treated as married for federal law purposes if they are in a same-sex marriage under applicable state law, there are circumstances where it is unclear which state law will be applicable for this purpose.
The Windsor ruling affects over 1,300 federal laws and regulations, including a number that bear on the design and administration of employee benefit plans, such as the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Family and Medical Leave Act (“FMLA”).
The Windsor decision did not disturb Section 2 of DOMA, which allows states to refuse to recognize same-sex marriages performed under the laws of other states. Thirteen states, including all of the New England states, and the District of Columbia currently recognize same-sex marriages. A number of other states recognize some equivalent right, such as civil unions or domestic partnerships. Thirty-seven states, however, have DOMA-type statutes that define the term “spouse” for purposes of state law as a union of one man and one woman. Thus, the Windsor decision has left a patchwork of conflicting state laws under which the terms “married” and “spouse” will have different meanings for purposes of state law.
For benefit plans, many complexities emerge, as discussed more fully below. For retirement plans, the definition of spouse affects many plan provisions and operations, such as survivor benefits, consent requirements (for loans, beneficiaries and distributions), beneficiary designations and minimum distribution requirements. For welfare benefits, the definition affects eligibility and taxability of, among other things, health, dental, vision and accident benefits, and changes cafeteria plans. Nonqualified deferred compensation plans, particularly supplemental executive retirement plans, might also be affected, depending upon how spouse is defined. Note, however, that any changes made to comport with the new federal law treatment might not comport with state law treatment in all jurisdictions.
In some cases, however, the Windsor decision might simplify plan administration. Employers that voluntarily covered same-sex spouses under their welfare plans may now provide pre-tax benefits to such same-sex spouses in the same way they provided benefits to opposite-sex spouses without violating the Internal Revenue Code. Also, if they have been paying gross-ups to remedy inequitable tax treatment, they can stop doing so now. However, the Windsor decision leaves unclear how plans, plan sponsors and perhaps plan fiduciaries are to deal with conflicting state laws defining marriage for purposes of determining a spouse under the plan. For example, does the choice of law provision in the plan document govern on this issue or does the plan decide this on a case-by-case or participant-by-participant basis? Does this depend on the state of celebration of the same-sex marriage or state of domicile of the same-sex spouses? Early indications (from statements by President Obama) are, however, that for purposes of federal law the government will likely adopt a rule of nationwide validity of same-sex marriages entered into in states that make civil marriages available to same-sex couples. This, of course, would be administratively most efficient since plan administrators would not need to look beyond the marriage license to determine the sex of the parties and the recognition status of the marriage in a particular state and would avoid the need for changes to the plan terms and plan administrative procedures as state laws change–a trend likely to continue.
Also important is the lack of any indication in the Windsor decision as to the retroactivity of its determination of unconstitutionality of Section 3 of DOMA. Since 1996, plans have relied upon the constitutionality of this provision. Prompt action might be needed regarding plan operations and administration to preserve retirement plan qualification. Guidance from federal agencies is expected, but while such guidance (in particular, from the Internal Revenue Service (“IRS”) under Code section 7805(b)) might limit the retroactivity of the decision regarding the tax effects of the decision, to the extent substantive legal rights are affected (such as spousal survivor rights under ERISA retirement plans), the courts, through litigation, might ultimately need to provide the answers.
Plan design might also be affected by the Windsor decision. Some benefit plans voluntarily covered same-sex spouses before the decision. Now, other benefit plans, at least in the jurisdictions that recognize same-sex marriages, cannot rely on DOMA to deny recognition to legally married same-sex spouses, and will need to determine what they can and want to do in such cases–a question that is now far more visible.
Suggested Implementation Steps
While awaiting guidance from the relevant federal agencies, employers should consider beginning the process of assessing and responding to the Windsor decision’s impact on their employee benefit arrangements. Although, as noted, final resolution of some issues may require agency or court guidance, it would be prudent to begin taking the following steps:
* Review. Look through all benefit plans and policies, as well as related administrative practices, to identify situations where marital status is relevant. In this regard, the following sections identify a number of employee benefit requirements that are affected by the Windsor decision. However, relevant plan documents might include other references to spouses or marriage that would have to be evaluated as a result of Windsor.
* Analysis. Determine how the Windsor decision will affect the treatment of marital status under the employer’s benefit programs. In analyzing these issues, employers should take into account the extent to which their plans have previously provided benefits to same-sex spouses, individuals in civil unions under state law or persons who qualify as domestic partners under the employer’s policies. Employers will need to consider how plan changes will impact all of these groups.
* Coordination. Contact insurers, payroll services, third-party administrators and other service providers to discuss the changes in policies and procedures that may be necessary or appropriate as a result of Windsor.
* Communication. Notify employees of the impact Windsor will have on benefit arrangements if they have a same-sex spouse and suggest that they may wish to consider reviewing their benefit-related decisions (e.g., medical plan elections or beneficiary designations) in light of the changes to the employer’s plans and policies that result from the decision. It may be appropriate to identify and reach out to employees that the employer knows may be affected by the Windsor decision and (depending on the circumstances) note the impact on their existing beneficiary designations, tax withholding forms (i.e., Form W-4), etc.
* Revision. Make appropriate amendments to benefit plan documents and revisions to forms and policies to reflect the impact of Windsor (although in many cases it may be appropriate to delay plan amendments until after the IRS and other relevant federal agencies provide guidance).
Impact of Windsor on Benefit Plans
The following sections identify a number of situations involving same-sex marriage where the Windsor decision changes the application of federal law to employee benefit arrangements. In some cases, these changes will entitle same-sex spouses to new rights under benefit plans. In other situations, Windsor changes the federal tax treatment applicable to participants and their same-sex spouses. Note that Windsor generally does not affect state income tax treatment in these circumstances. Note also that there may be circumstances not identified in the following sections where Windsor might have an effect on employee benefits, e.g., where a plan document affords special benefits to spouses that are not legally required.
Windsor’s Impact on Retirement Plans
* Spousal Benefit Rights. Same-sex spouses now have the following spousal benefit rights under retirement plans:
o Surviving spouses of participants in most 401(k) plans, ERISA-covered 403(b) plans and certain other defined contributions plans must be treated as the primary beneficiary of 100 percent of the participant’s plan accounts unless the spouse consents to the designation of another beneficiary in writing.
o Surviving spouses of participants in tax-qualified defined benefit pension plans or money purchase pension plans (and certain other defined contribution plans) are entitled to receive pre-retirement survivor benefits under the plans if the employee dies prior to commencement of benefits.
o Spouses of participants in qualified defined benefit pension plans, money purchase pension plans (and certain other defined contribution plans) are entitled to share in the participant’s retirement benefits through a joint and survivor annuity unless the spouse elects to waive that protection.
* Consent Loans. Under certain types of plans (such as a money purchase pension plan), participants now may not borrow against their plan benefits without the written consent of their same-sex spouses.
* Hardship Withdrawals. Hardship withdrawals by participants from 401(k) and 403(b) plans (and withdrawals for unforeseen emergencies under 457(b) plans and other non-qualified deferred compensation plans) may now take into account certain expenses (such as medical, tuition and funeral expenses) of same-sex spouses.
* QDROs. A participant’s benefits under tax-qualified plans and other plans covered by ERISA may now be transferred to a same-sex spouse under a qualified domestic relations order if the participant and spouse divorce.
* Rollovers. A same-sex spouse who receives plan distributions upon the participant’s death may now roll over that distribution to his or her own IRA or a qualified retirement plan.
* Required Minimum Distribution (“RMD”) Rules. The favorable RMD rules applicable to married participants under tax-qualified plans, 403(b) plans, 457(b) plans, and IRAs are now applicable to participants with same-sex spouses (e.g., the annual RMD is reduced if the participant is married to a spouse who is more than ten years younger, and the spouse may wait until the participant would have turned age 70-1/2 before commencing the receipt of his or her death benefit).
Windsor’s Impact on Health Plans and Other Fringe Benefits
* Tax Treatment of Health Plan Coverage.
o Employers may now provide health plan coverage to their employees’ same-sex spouses without imputing taxable income to their employees on the value of the spouse’s coverage.
o Pre-tax treatment is now permitted for employee contributions for health plan coverage, as well as medical reimbursements for eligible expenses of same-sex spouse under flexible benefit (i.e., “cafeteria”) plans.
o No FICA or FUTA tax will be payable on employer-provided health coverage for, or employee pre-tax payments relating to, an employee’s same-sex spouse. (Some employers are considering filing for refunds of FICA and FUTA taxes paid with regard to same-sex spousal coverage in the past, although it would be advisable to wait for IRS guidance in that regard.)
* COBRA. Health care continuation rights under COBRA must now be provided for same-sex spouses covered by employers’ health plans to the same extent as is required for opposite-sex spouses.
* HIPAA. HIPAA enrollment rights permitting immediate enrollment in a health plan when certain events occur will now apply to same-sex spouses to the same extent as is required for covered opposite-sex spouses.
* Dependent Care Plans. Same-sex spouses may now receive the same favorable federal income tax treatment regarding dependent care flexible benefits plans as is available to opposite-sex spouses.
* Life Insurance. Group term life insurance coverage of up to $2,000 generally may now be provided to same-sex spouses of employees to the same extent that tax treatment is available to opposite-sex spouses.
* Miscellaneous. Same-sex spouses of employees may now be provided with various benefits that receive favorable treatment for federal income tax purposes (subject to applicable IRS requirements), such as retirement planning services, employee discounts, no additional cost services, use of certain employer-provided athletic facilities and tuition reduction for educational organization employees.
* FMLA Policy. The FMLA provides various leave of absence rights to eligible employees. Those rights include rights to take leaves of absence based on spousal relationships in certain circumstances, including the right to take an FMLA-protected leave to care for a spouse with a serious health condition. Employees with same-sex spouses will now have the same FMLA rights and will be subject to the same limitations on FMLA rights applicable to other spousal relationships.
The foregoing suggests that employers and plan sponsors currently will have more questions than answers on how to fully implement the Windsor decision. Further guidance is clearly needed, and hopefully, much of it will be forthcoming shortly. In the meantime, however, there is significant work ahead for employers in reviewing internally their plan documents, participant communications (including forms such as beneficiary designations and distribution materials), policies, procedures and the directions they have provided to vendors administering their plans or employment policies. On a going-forward basis, note that the Windsor decision is already in effect. For much of this work, it would appear that employers and plan sponsors will clearly need the assistance of benefits counsel. Plan amendments will need to be drafted and the risk of potential benefit claims under Title I of ERISA (for retroactive periods) considered. Please contact us if you have any questions or would like use to get started on any reviews or otherwise. Please note also that the foregoing is not intended as a definitive list, but only a starting point.