The Supreme Court’s Same-Sex Marriage Decision and Its Effects on Your Company’s Employee Benefits Plans
The Defense of Marriage Act (DOMA) was enacted by Congress on September 21, 1996. DOMA excluded same-sex couples from the definition of marriage and prevented same-sex couples from being recognized as "spouses" for purposes of rights, benefits and privileges under the federal laws.
United States v. Windsor
On June 26, 2013, the United States Supreme Court ruled in United States v. Windsor that a portion of DOMA is unconstitutional. The Court determined that Section 3 of DOMA defining “marriage” for federal purposes to only be between a man and a woman violates the principles of equal protection and due process under the U.S. Constitution.
Internal Revenue Service and Department of Labor Response
In response to the Windsor decision, the IRS published Revenue Ruling 2013-17 defining “marriage” to include same-sex marriage for federal tax purposes if the marriage was valid in the state of celebration of the ceremony regardless of the couple’s state of domicile. The IRS ruling is effective prospectively as of September 16, 2013. Affected individuals may file tax refund requests for years prior to that date to the extent the statute of limitations remains open. In addition, on September 18, 2013, the Department of Labor (DOL) published Technical Release No. 2013-04, mirroring the IRS definition of marriage. Neither the Windsor decision nor the IRS/DOL responses have any effect on the federal tax treatment on ceremonies other than marriage such as domestic partnerships, civil unions and common law marriages.
As of the date of the IRS guidance, California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington and Washington D.C. recognize same-sex marriage. Since the date of the IRS guidance, New Jersey has also recognized same-sex marriage.
Effect on Qualified Retirement Plans
The definition of “marriage” and “spouse” play a key role in qualified retirement plans. Windsor and the IRS and DOL responses have the following impacts on such plans:
- Surviving Spouse Death Benefits: Following the IRS and DOL guidance, a same-sex spouse will be entitled to death benefits due to a surviving spouse under a plan unless the spouse consents to an alternate beneficiary. If there is no effective beneficiary designation at death, a participant’s account is paid out to a default beneficiary. The default beneficiary under most plans is a surviving spouse or the participant’s estate. Plans providing a surviving spouse as the default beneficiary will need to include same-sex spouses as a potential default beneficiary.
- Consent to Alternate Beneficiary: A non-spouse primary beneficiary may not be named by a participant unless the spouse consents to the alternative beneficiary. If a participant would like to name a death beneficiary for the participant’s account other than the participant’s spouse, including a same-sex spouse, the spouse must provide consent.
- Hardship Distributions: Some retirement plans allow participants to take “hardship distributions”. In general, hardship distributions can only be made when the participant suffers an immediate and heavy financial need. Hardship distributions are limited to the amount necessary to address such need. Examples of such needs include:
- post-secondary education tuition and room and board for the participant or the participant’s spouse; or
- payment of funeral and burial expenses for a participant’s spouse.
Allowable hardship distribution should consider any permitted expenses for a same-sex spouse.
- Plans with Qualified Annuities: Defined benefit plans (and defined contribution plans containing assets merged from a defined benefit plan or that otherwise offer survivor annuity options) must provide any death benefits to participant’s spouse in one of two ways. If the participant dies following retirement, the plan must offer death benefits via a Qualified Joint and Survivor Annuity. If the participant dies prior to retirement, the plan must offer death benefits via a Qualified Pre-Retirement Survivor Annuity. The annuity options may be waived with the consent of the participant’s spouse. In addition, plans that are subject to the annuity options require spousal consent prior to payment of a participant loan from the plan. In both situations, same-sex spouses in recognized marriage are now considered spouses for purposes of the qualified annuity requirements.
- Qualified Domestic Relations Orders: A Qualified Domestic Relations Order (QDRO) is a court order issued following divorce or separation of a married couple that includes the separation of retirement plan benefits between the spouses. Following Windsor, a same-sex spouse is now eligible to seek entry of a QDRO for the equitable separation of a spouse's retirement benefits under a qualified retirement plan upon dissolution of the marriage.
- Required Minimum Distributions (RMDs): Each year following a participant’s attainment of age 70½, or the year in which a participant that is not an owner of the plan sponsor retires, if later, RMDs must be withdrawn annually from a plan. Upon the death of a participant, this RMD requirement applies to the participant’s beneficiary. Favorable tax treatment exists for surviving spouse beneficiaries, including greater deferral opportunities, which will now be available to same sex-spouses.
- Ownership Attribution Rules: Attribution of ownership of an entity between spouses (one spouse being deemed the owner of a business owned by his or her spouse) is used for numerous purposes related to retirement plans. Attribution is used, for example, to determine:
- who is considered a highly compensated employee;
- if a controlled group of related business entities exists; and
- who is a disqualified person for purposes of the prohibited transaction rules.
Following the Windsor ruling and IRS and DOL guidance, ownership of business entities will now be attributed among same-sex spouses.
Effect on Health and Welfare Benefits Plans and Other Fringe Benefits
Windsor and the IRS and DOL responses have the following impacts on health and welfare benefits plans and the benefits offered thereunder due to the definition of “marriage” and “spouse” playing a key role in such plans:
- Health Plans: Group health plans often provide some degree of subsidized health insurance benefits to employees and their spouses on a tax-free basis. To the extent your health plan provides such coverage, same-sex spouses should be made eligible.
- COBRA Continuation of Health Coverage: COBRA provides workers and their families who would otherwise lose health benefits following occurrence of a qualifying event the right to choose to continue group health plan benefits. Most qualifying events are related to the worker or the worker’s spouse. Examples include voluntary or involuntary job loss, reduction in hours worked, death of the worker and divorce. Following Windsor, continuation of coverage eligibility for covered employees must be available to workers with same-sex spouses suffering qualifying events.
- Cafeteria Plans, Flexible Spending Arrangements, Health Savings Account and Health Reimbursement Arrangements: As of September 16, 2013, an employee that is legally married to a same-sex spouse may be eligible to pay medical expenses of or for the spouse on a pre-tax basis to the extent the expenses are allowed by a cafeteria plan, flexible spending arrangement or health reimbursement arrangement.
- Family Medical Leave Act: The Family Medical Leave Act (FMLA) allows employees of covered employers (generally, those with 50 or more employees) to take job-protected unpaid leave for up to 12 weeks to attend to personal or family member illness. FMLA-eligible leave also includes the care of the employee’s spouse, family member military leave, pregnancy, adoption and foster care placement of a child. When determining whether a request for unpaid leave is covered by FMLA, the circumstances of a same-sex spouse must be considered in determining eligibility for FMLA protection. Please note that as currently written, the FMLA regulations base the determination of who qualifies as a spouse on the law of the state of residency of the employee. This means if an employee travels to a state that recognizes same-sex marriage, but resides in a state that does not recognize the marriage, for FMLA purposes only, and under current guidance, the employee would not be eligible for FMLA in order to care for the same-sex spouse because under the law of the state of residence, the spouse is not legally recognized as such. The DOL has indicated that revisions are being considered for the FMLA regulations to modify the relevant laws to be those of the state of celebration rather than the state of residency to match prior DOL guidance.
Response Required by Employers
Employers should communicate with employees about the changes in law and the effects of the Windsor decision and IRS and DOL guidance on the employer’s retirement, health and other fringe benefits. Employers should request any affected employees provide notice of a valid same-sex marriage. To the extent eligibility for benefits or any related forms, such as beneficiary designations, are affected by to the Windsor decision, revisions may be required. Lastly, we would recommend that all documents affecting employee benefits, including retirement and health plan documents and related forms, policies and procedures be reviewed by a qualified professional to ensure compliance with current law and avoid plan disqualification due to non-compliance.
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