Defining 'Spousal' Benefits

Recent moves by various cities, states, and municipalities to legalize or ban same-sex marriage have generated a flood of press, but little concrete advice as to the potential implications of these laws and related court rulings. The dearth of specific and actionable analysis of the implications of these shifts in the law places law firms, as well as most large enterprises, at a competitive disadvantage by forcing them to react as these laws change. This issue is an especially pressing one for large law firms with offices in many states because the definition of “spouse,” and thus the availability of “spousal” benefits, may differ in diverse localities.

It certainly does not take a lawyer to realize the enormous potential for claims of sex discrimination that may follow on the heels of this ambiguity, and any human resources professional can attest to the importance of these types of programs to attracting and retaining talented employees. This article attempts to fill that void by providing a more detailed analysis of the implications of changes in marriage laws for law firms' benefits programs. While each firm must analyze the specifics of its benefits programs with an eye to its own unique structure and core values, this analysis should provide every firm with a starting point to evaluate the issues raised by the application of current benefits programs to same-sex spouses.

The State of the Law on Same-Sex Partnerships

The Federal Defense of Marriage Act of 1996 (DOMA) defines “marriage” for all federal law purposes as the legal union between one man and one woman, and “spouse” as a person of the opposite sex who is a husband or wife. DOMA also permits states to decline to recognize a gay marriage authorized in one state, and dozens of states have adopted statutes defining marriage as only being between one man and one woman. Other states, including, most notably, Massachusetts, have refused to define marriage to exclude same-sex couples. This varying treatment of the issue has created conflicts between state and federal laws, as well as substantial ambiguity.

With respect to employee benefits, the application of DOMA means that same-sex individuals are not treated as spouses for purposes of ERISA and the Internal Revenue Code. DOMA does not prohibit employers from designing their plans to define “spouse” to include same-sex individuals for purposes of internal operations of the plan. However, where tax treatment is involved or there are exceptions to otherwise prohibited actions (eg, the qualified domestic relations order exception to ERISA's and the Internal Revenue Code's “anti-alienation rule” applicable to pension plans), the DOMA definition would control. Thus, depending upon the benefit plan design, a same-sex individual could be a spouse for some purposes with respect to a plan but not for other purposes. While not exhaustive, the following sections of this article highlight some of the more important benefits issues that are likely to be relevant for the majority of large law firms: retirement plans, health care plans, and other benefits.

[Editor's Note: The Law Journal Newsletters Web site Home Page features an interactive map of the states with daily updates on the status of same-sex marriage and adoption laws and activity, courtesy of our sibling newsletter, The Matrimonial Strategist. The Matrimonial Strategist has also just published a Special Issue on same-sex marriage, which is available on its Web site.]

Potential Implications for Firm Retirement Plans

The definition of the term “spouse” delineated in your firm's retirement plan is an excellent place to start in evaluating the potential implications of same-sex partnerships on the firm's benefits program. Some 401(k) and other retirement savings plans provide that the term “spouse” is defined as it is in DOMA. Thus, for purposes of administering these types of plans, a same-sex individual would not be treated as a spouse. Rather, the employee would be treated as if he/she is unmarried. In addition, as a result of the application of DOMA, same-sex partners would not be treated as spouses for any tax-related purposes under these plans. For example, these plans would not require consent of a same-sex spouse to designate someone other than the spouse as the employee's primary beneficiary.

However, most retirement plans do not define “spouse.” Employers should review their plans and employee communications, decide if same-sex spouses will be treated as spouses for plan purposes, and amend the relevant documents accordingly. Otherwise, there is a substantial risk of confusion and lawsuits. For example, many retirement plans provide that the default beneficiary (ie, the beneficiary in the event the participant fails to designate a beneficiary) is the surviving spouse, then the employee's children, then the employee's estate. An employee with a same-sex spouse may want to designate the same-sex spouse as beneficiary, but relying on the default beneficiary provision as described in the relevant employee communications may not actually designate that person as beneficiary. In that case, if the plan does not recognize same-sex marriages, the benefit will end up being paid to the employee's children (if any) or estate, which could result in hard feelings and a potential lawsuit by the surviving same-sex spouse.

Even if plans decide to recognize same-sex marriages, it is important to note that the DOMA definition will not allow such treatment with respect to certain legal requirements. For example, a domestic relations order requiring transfer of all or a portion of the employee's retirement benefit to a same-sex spouse could not be recognized without violating ERISA and the Code, because the DOMA definition applies for that purpose. Any state law to the contrary would likely be preempted by ERISA. Also, distributions to same-sex spouses are not eligible for the favorable tax treatment available for distributions to opposite-sex spouses (eg, the ability to “roll over” the distribution and defer tax). Thus, if the employer wants to treat same-sex spouses as married for retirement plan purposes, it may do so for most purposes, but federal law imposes some constraints. A key is making sure employees and same-sex spouses are made aware of the treatment the employer has decided to utilize.

Potential Implications or Firm Health Care Plans

Many firms seek to avoid the issue of coverage of same-sex spouses by assuming that a “domestic partner” provision in a health care plan can serve as a “catch all” for same-sex employee spouses. However, if your law firm's plan permits employees to cover their domestic partners, the same-sex spouse of a participant will not necessarily qualify as a domestic partner. Most health care plans contain provisions limiting the term “domestic partner” by certain criteria, such as an individual who shares the participant's financial obligations and who has lived with the participant for some period of time and intends to do so indefinitely into the future. This definition could exclude a significant number of employees and their same-sex spouses.

Moreover, the term “domestic partner” is commonly defined, in part, as someone who cannot legally marry the employee. Until recently, this definition effectively limited eligibility for domestic partner benefits to same-sex domestic partners. However, recent legal developments in states and localities allowing same-sex couples to marry raise the possibility that domestic partners could lose coverage under an employer's plan if then can legally marry. As a result, these changes may actually exclude same-sex spouses of employees unless the law firm amends its definition of domestic partner.

Even if same-sex spouses can be covered under a plan provision allowing coverage of domestic partners, for a variety of reasons, some employees may want to cover their same-sex spouses as “spouses” rather than as domestic partners. Given that federal law generally does not limit who may be covered as a dependent under an employee benefit plan, law firms may, if they wish, treat same-sex spouses as spouses. This flexibility, in turn, may provide opportunities for firms who wish to customize their health care plans to accommodate the concerns of employees in same-sex partnerships. However, to the extent that a firm provides benefits under an insured arrangement, it should check with its insurance carrier before allowing coverage of same-sex spouses. For example, Virginia law does not permit health insurance coverage of domestic partners, and most likely will be interpreted by the Virginia Department of Insurance to also prohibit coverage of same-sex spouses.

As a practical matter, unless a firm's health care plan gives the term “spouse” the same meaning for all employees, plan administration may be made substantially more complicated. For example, if an employee who is married to a same-sex individual works in a firm's Massachusetts office, but subsequently moves to the firm's Chicago office, it would not be clear whether that individual would lose spousal coverage. If that individual would not lose spousal coverage, would an otherwise similarly-situated employee with a same-sex spouse who had never lived and worked in the Massachusetts office be treated in the same way? In lieu of a uniform rule, coverage would depend on the state in which an individual resides rather than his or her status, possibly requiring complicated case-by-case determinations. In turn, these types of case-by-case determinations may open the firm to claims of discrimination. Beyond concerns for potential litigation, these types of individualistic determinations are bound to breed discontentment among employees, resulting in dissatisfaction and potential departures.

Additionally, as noted previously, DOMA sets forth the definition of “spouse” for federal law purposes, including the tax code. The exclusion from income for employer-provided health coverage is applicable only for employees, spouses, and “dependents.” Individuals of the same sex cannot qualify as spouses for federal tax purposes, so the income exclusion would be available only if the same-sex spouse qualifies as the employee's dependent.

This is not an easy definition for the same-sex spouse to meet. Section 152 of the Internal Revenue Code provides that a same-sex spouse would qualify as a dependent only if the spouse was a member of the employee's household during the employee's entire taxable year; the employee's home is the spouse's principal place of abode; and the employee provides more than half of the spouse's support. As a result, any employer “subsidy” for the coverage of the same-sex spouses generally would be taxable income to the employee, and also would be subject to employment taxes. Additionally, if a same-sex spouse is treated as a spouse for state law purposes, the question of whether that individual would be treated as a spouse for state tax purposes may have to be evaluated on a case-by-case basis, resulting in further room for ambiguity and differential treatment across multiple offices and geographies. In January 2002, the California legislature enacted Assembly Bill 25, which, among its many effects on same sex spousal relationships, amends California law to provide that a domestic partner is a “dependent” so that benefits received for a domestic partner are exempt from state taxation. However, many states have not addressed this problem as directly, leaving the application of state taxation laws to same sex spouses in a state of uncertainty.

Potential Implications for Other Benefits

Because spousal status is so frequently used to determine eligibility for numerous benefits, the same types of problems and ambiguities discussed above manifest in a host of common benefit programs law firms may provide to their employees. These programs include: life insurance, dependent care, child-care leaves, FMLA leaves (although only under state FMLA-type laws; DOMA governs with respect to the federal FMLA), and adoption assistance programs. Firms must and should examine these programs in light of the tax implications and laws ' both state and federal ' that govern them in order to formulate a comprehensive approach to the issue of benefits coverage of same-sex partners.

Additionally, law firms serving public sector clients should recognize that their benefits policies for their employees may be impacted by these clients' laws governing same sex partnerships. For example, cities such as San Francisco, Los Angeles, and Seattle have ordinances requiring private employers that contract with those cities to provide health and certain other benefits to their employees' domestic partners.

Conclusion

The bottom line is that shifts in the laws defining who is married for the purposes of state and federal law will continue. While no one can confidently predict the direction the law will take on these issues, it is clear that law firms must and should be proactive in addressing the potential implications their current benefit policies may have for employees with same-sex partners. Reacting only as problems arise is very likely to result in inconsistent benefits determinations, opening the firm up to liability that could be avoided by an examination of current benefits policies through the lens of same-sex partnerships. A reactive strategy will also be unpopular with both current and prospective employees ' in a labor market where the best employees at all levels may make their decisions based upon their perceptions of the strength of the firm's benefits programs it is important to address the ambiguities in the laws governing same-sex partnerships rather than avoiding them.

To check on the latest federal and state developments in same-sex marriage and adoption laws, check out LJN's interactive Same-Sex Marriage: State-by-State map.

Recent moves by various cities, states, and municipalities to legalize or ban same-sex marriage have generated a flood of press, but little concrete advice as to the potential implications of these laws and related court rulings. The dearth of specific and actionable analysis of the implications of these shifts in the law places law firms, as well as most large enterprises, at a competitive disadvantage by forcing them to react as these laws change. This issue is an especially pressing one for large law firms with offices in many states because the definition of “spouse,” and thus the availability of “spousal” benefits, may differ in diverse localities.

It certainly does not take a lawyer to realize the enormous potential for claims of sex discrimination that may follow on the heels of this ambiguity, and any human resources professional can attest to the importance of these types of programs to attracting and retaining talented employees. This article attempts to fill that void by providing a more detailed analysis of the implications of changes in marriage laws for law firms' benefits programs. While each firm must analyze the specifics of its benefits programs with an eye to its own unique structure and core values, this analysis should provide every firm with a starting point to evaluate the issues raised by the application of current benefits programs to same-sex spouses.

The State of the Law on Same-Sex Partnerships

The Federal Defense of Marriage Act of 1996 (DOMA) defines “marriage” for all federal law purposes as the legal union between one man and one woman, and “spouse” as a person of the opposite sex who is a husband or wife. DOMA also permits states to decline to recognize a gay marriage authorized in one state, and dozens of states have adopted statutes defining marriage as only being between one man and one woman. Other states, including, most notably, Massachusetts, have refused to define marriage to exclude same-sex couples. This varying treatment of the issue has created conflicts between state and federal laws, as well as substantial ambiguity.

With respect to employee benefits, the application of DOMA means that same-sex individuals are not treated as spouses for purposes of ERISA and the Internal Revenue Code. DOMA does not prohibit employers from designing their plans to define “spouse” to include same-sex individuals for purposes of internal operations of the plan. However, where tax treatment is involved or there are exceptions to otherwise prohibited actions (eg, the qualified domestic relations order exception to ERISA's and the Internal Revenue Code's “anti-alienation rule” applicable to pension plans), the DOMA definition would control. Thus, depending upon the benefit plan design, a same-sex individual could be a spouse for some purposes with respect to a plan but not for other purposes. While not exhaustive, the following sections of this article highlight some of the more important benefits issues that are likely to be relevant for the majority of large law firms: retirement plans, health care plans, and other benefits.

[Editor's Note: The Law Journal Newsletters Web site Home Page features an interactive map of the states with daily updates on the status of same-sex marriage and adoption laws and activity, courtesy of our sibling newsletter, The Matrimonial Strategist. The Matrimonial Strategist has also just published a Special Issue on same-sex marriage, which is available on its Web site.]

Potential Implications for Firm Retirement Plans

The definition of the term “spouse” delineated in your firm's retirement plan is an excellent place to start in evaluating the potential implications of same-sex partnerships on the firm's benefits program. Some 401(k) and other retirement savings plans provide that the term “spouse” is defined as it is in DOMA. Thus, for purposes of administering these types of plans, a same-sex individual would not be treated as a spouse. Rather, the employee would be treated as if he/she is unmarried. In addition, as a result of the application of DOMA, same-sex partners would not be treated as spouses for any tax-related purposes under these plans. For example, these plans would not require consent of a same-sex spouse to designate someone other than the spouse as the employee's primary beneficiary.

However, most retirement plans do not define “spouse.” Employers should review their plans and employee communications, decide if same-sex spouses will be treated as spouses for plan purposes, and amend the relevant documents accordingly. Otherwise, there is a substantial risk of confusion and lawsuits. For example, many retirement plans provide that the default beneficiary (ie, the beneficiary in the event the participant fails to designate a beneficiary) is the surviving spouse, then the employee's children, then the employee's estate. An employee with a same-sex spouse may want to designate the same-sex spouse as beneficiary, but relying on the default beneficiary provision as described in the relevant employee communications may not actually designate that person as beneficiary. In that case, if the plan does not recognize same-sex marriages, the benefit will end up being paid to the employee's children (if any) or estate, which could result in hard feelings and a potential lawsuit by the surviving same-sex spouse.

Even if plans decide to recognize same-sex marriages, it is important to note that the DOMA definition will not allow such treatment with respect to certain legal requirements. For example, a domestic relations order requiring transfer of all or a portion of the employee's retirement benefit to a same-sex spouse could not be recognized without violating ERISA and the Code, because the DOMA definition applies for that purpose. Any state law to the contrary would likely be preempted by ERISA. Also, distributions to same-sex spouses are not eligible for the favorable tax treatment available for distributions to opposite-sex spouses (eg, the ability to “roll over” the distribution and defer tax). Thus, if the employer wants to treat same-sex spouses as married for retirement plan purposes, it may do so for most purposes, but federal law imposes some constraints. A key is making sure employees and same-sex spouses are made aware of the treatment the employer has decided to utilize.

Potential Implications or Firm Health Care Plans

Many firms seek to avoid the issue of coverage of same-sex spouses by assuming that a “domestic partner” provision in a health care plan can serve as a “catch all” for same-sex employee spouses. However, if your law firm's plan permits employees to cover their domestic partners, the same-sex spouse of a participant will not necessarily qualify as a domestic partner. Most health care plans contain provisions limiting the term “domestic partner” by certain criteria, such as an individual who shares the participant's financial obligations and who has lived with the participant for some period of time and intends to do so indefinitely into the future. This definition could exclude a significant number of employees and their same-sex spouses.

Moreover, the term “domestic partner” is commonly defined, in part, as someone who cannot legally marry the employee. Until recently, this definition effectively limited eligibility for domestic partner benefits to same-sex domestic partners. However, recent legal developments in states and localities allowing same-sex couples to marry raise the possibility that domestic partners could lose coverage under an employer's plan if then can legally marry. As a result, these changes may actually exclude same-sex spouses of employees unless the law firm amends its definition of domestic partner.

Even if same-sex spouses can be covered under a plan provision allowing coverage of domestic partners, for a variety of reasons, some employees may want to cover their same-sex spouses as “spouses” rather than as domestic partners. Given that federal law generally does not limit who may be covered as a dependent under an employee benefit plan, law firms may, if they wish, treat same-sex spouses as spouses. This flexibility, in turn, may provide opportunities for firms who wish to customize their health care plans to accommodate the concerns of employees in same-sex partnerships. However, to the extent that a firm provides benefits under an insured arrangement, it should check with its insurance carrier before allowing coverage of same-sex spouses. For example, Virginia law does not permit health insurance coverage of domestic partners, and most likely will be interpreted by the Virginia Department of Insurance to also prohibit coverage of same-sex spouses.

As a practical matter, unless a firm's health care plan gives the term “spouse” the same meaning for all employees, plan administration may be made substantially more complicated. For example, if an employee who is married to a same-sex individual works in a firm's Massachusetts office, but subsequently moves to the firm's Chicago office, it would not be clear whether that individual would lose spousal coverage. If that individual would not lose spousal coverage, would an otherwise similarly-situated employee with a same-sex spouse who had never lived and worked in the Massachusetts office be treated in the same way? In lieu of a uniform rule, coverage would depend on the state in which an individual resides rather than his or her status, possibly requiring complicated case-by-case determinations. In turn, these types of case-by-case determinations may open the firm to claims of discrimination. Beyond concerns for potential litigation, these types of individualistic determinations are bound to breed discontentment among employees, resulting in dissatisfaction and potential departures.

Additionally, as noted previously, DOMA sets forth the definition of “spouse” for federal law purposes, including the tax code. The exclusion from income for employer-provided health coverage is applicable only for employees, spouses, and “dependents.” Individuals of the same sex cannot qualify as spouses for federal tax purposes, so the income exclusion would be available only if the same-sex spouse qualifies as the employee's dependent.

This is not an easy definition for the same-sex spouse to meet. Section 152 of the Internal Revenue Code provides that a same-sex spouse would qualify as a dependent only if the spouse was a member of the employee's household during the employee's entire taxable year; the employee's home is the spouse's principal place of abode; and the employee provides more than half of the spouse's support. As a result, any employer “subsidy” for the coverage of the same-sex spouses generally would be taxable income to the employee, and also would be subject to employment taxes. Additionally, if a same-sex spouse is treated as a spouse for state law purposes, the question of whether that individual would be treated as a spouse for state tax purposes may have to be evaluated on a case-by-case basis, resulting in further room for ambiguity and differential treatment across multiple offices and geographies. In January 2002, the California legislature enacted Assembly Bill 25, which, among its many effects on same sex spousal relationships, amends California law to provide that a domestic partner is a “dependent” so that benefits received for a domestic partner are exempt from state taxation. However, many states have not addressed this problem as directly, leaving the application of state taxation laws to same sex spouses in a state of uncertainty.

Potential Implications for Other Benefits

Because spousal status is so frequently used to determine eligibility for numerous benefits, the same types of problems and ambiguities discussed above manifest in a host of common benefit programs law firms may provide to their employees. These programs include: life insurance, dependent care, child-care leaves, FMLA leaves (although only under state FMLA-type laws; DOMA governs with respect to the federal FMLA), and adoption assistance programs. Firms must and should examine these programs in light of the tax implications and laws ' both state and federal ' that govern them in order to formulate a comprehensive approach to the issue of benefits coverage of same-sex partners.

Additionally, law firms serving public sector clients should recognize that their benefits policies for their employees may be impacted by these clients' laws governing same sex partnerships. For example, cities such as San Francisco, Los Angeles, and Seattle have ordinances requiring private employers that contract with those cities to provide health and certain other benefits to their employees' domestic partners.

Conclusion

The bottom line is that shifts in the laws defining who is married for the purposes of state and federal law will continue. While no one can confidently predict the direction the law will take on these issues, it is clear that law firms must and should be proactive in addressing the potential implications their current benefit policies may have for employees with same-sex partners. Reacting only as problems arise is very likely to result in inconsistent benefits determinations, opening the firm up to liability that could be avoided by an examination of current benefits policies through the lens of same-sex partnerships. A reactive strategy will also be unpopular with both current and prospective employees ' in a labor market where the best employees at all levels may make their decisions based upon their perceptions of the strength of the firm's benefits programs it is important to address the ambiguities in the laws governing same-sex partnerships rather than avoiding them.

To check on the latest federal and state developments in same-sex marriage and adoption laws, check out LJN's interactive Same-Sex Marriage: State-by-State map.