Section 3 of DOMA Ruled Unconstitutional

[Editor's Note: We will have an updated version of this article reflecting the above development next week.]

On June 26, 2013, the U.S. Supreme Court, in United States v. Windsor, ruled that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional.' Section 3 of DOMA provides that in determining the meaning of any U.S. statute, ruling, regulation, or interpretation, 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 ruling specifically states that the opinion and its holding are confined to lawful marriages, and therefore does not specifically apply to civil unions, civil partnerships, or unions for which similar statutory or judicial rights are granted.

Based on the announcement by Office of Personnel Management (OPM) with respect to benefits for employees of the federal government, it is not unlikely that any guidance from the IRS or DOL will recognize same-sex marriages, but will not recognize civil unions or civil partnerships.' Thus, the current complex taxation rules will continue to apply to any employee with a same-sex partner who does not have a marriage certificate.

What Windsor Didn't Do

Section 2 of DOMA was not at issue in the Windsor case. Section 2 allows States to refuse to recognize same-sex marriages performed under the laws of other States, and presumably same-sex marriages performed under the laws of other countries.Thus, the ruling does not address the recognition of same-sex marriages in a jurisdiction performed outside a couple's state of residence.' Some statutory and regulatory provisions apply based on married status determined under the laws of the state of residence, and some provisions apply based on whether a lawful marriage certificate exists under the laws of the state of the ceremony.

Generally, for employee benefit plan purposes, ERISA and the tax code specifically reference “marriage under state law” without a specific reference to the state of residence or the ceremony state. Thus, based on the announcement by OPM with respect to benefits for employees of the federal government, it is not unlikely that guidance from the IRS and DOL will specifically permit or require employee benefit plans to recognize same-sex marriages based on the existence of a lawful marriage certificate, regardless of whether the employee's state of residence would recognize the marriage. Today, 13 states (California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington), the District of Columbia, and some foreign countries recognize marriages between same-sex couples.

What Has Clearly Changed

Until guidance is issued from the IRS and DOL, it remains unclear whether an employee benefit plan can or must recognize a same-sex marriage that was performed other than in the state of the employee's residence if the employee's state of residence does not recognize the marriage. It is clear that an employee benefit plan must recognize an employee's same-sex marriage if the employee's state of residence recognizes the employee's same-sex marriage. For those employees for whom the employee's state of residence recognizes the employee's same-sex marriage, the employer's employee benefit plans must recognize the employee's same-sex marriage in the same manner as an opposite-sex marriage. For example:

• The employer portion of the cost of same-sex spousal medical, dental, and vision coverage will no longer be included in income.
• Medical flexible spending accounts (FSAs), Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs) can be used for a same-sex spouse's qualified health expenses.
• The employee's portion of spousal medical, dental, and vision coverage can be paid on a pre-tax basis through a cafeteria (or Code ' 125) plan.
• Same-sex marriage, divorce or change in employment of the same-sex spouse will constitute a change in status allowing changes in cafeteria plan elections.
• The same-sex spouse has HIPAA special enrollment rights with respect to group health plans.
• The same-sex spouse has the right to COBRA upon divorce and an independent right to COBRA coverage on employee's loss of coverage on termination of employment or reduction in hours.
• A defined contribution plan (such as a profit sharing plan or 401(k) plan) must provide that the same-sex spouse is the employee's beneficiary unless the same-sex spouse consents to a different beneficiary.
• For purposes of the minimum required distributions at age 70', qualified retirement plans, 403(b) plans, IRAs and governmental 457(b) plans must treat a same-sex spouse as a spouse (for example, distributions upon death no longer have to be made within five years or commence within one year of death, and can instead begin when spouse would have attained 70').
• More favorable spousal rollover rules for distributions from qualified retirement plans, 403(b) plans, IRAs and governmental 457(b) plans upon death will apply to a same-sex spouse.
• A defined benefit plan (and certain defined contribution plans) must provide a qualified pre-retirement survivor annuity and qualified joint and survivor annuity (QJSA) to a same-sex spouse.
• Retirement Plans that are subject to the QJSA requirements and offer plan loans must obtain the same-sex spouse's consent to the loan.
• Qualified retirement plans must honor a qualified domestic relations order (QDRO) in favor of a same-sex spouse.

Effective Date and Retroactivity

Since Section 3 of DOMA was ruled unconstitutional, there is no clear answer as to the effective date of the change because declaring a law unconstitutional means that the law was never valid.' While guidance from the agencies may be forthcoming, it is unlikely any guidance will have specific rules for every situation as to how far back an employer must go to make any required changes. For example, consider the following:

1. Health Benefits Taxation. With respect to the taxation of health benefits for an employee whose coverage included a same-sex domestic partner, will the employee be permitted to file a claim for refund of the federal income and FICA taxes paid?' With respect to changes in the taxation of health benefits for 2013, it seems clearer that an employer should eliminate taxation of those health benefits for all of 2013. Thus, employers should begin to consider what changes will be needed to their payroll systems to change the tax treatment for all of 2013.' It may be prudent to wait until closer to the end of 2013 to take action to see if the IRS issues guidance.

2. Pension Commencement. If an employer has a defined benefit pension plan, any pension commencements after Windsor should take into account a same-sex spouse in the same manner as an opposite-sex spouse (for example, actuarial factors used and offers of qualified joint and survivor annuities). However, the question remains as to whether plans will be required to retroactively offer any options not available to same-sex spouses and make changes to existing elections and benefit calculations to take into account the changes required by Windsor. Similarly, if qualified pre-retirement survivor annuities have been denied to same-sex spouses, will employers be required to reconsider and change those decisions?

3. Payments to Beneficiaries. If an employer maintains a retirement plan (such as a 401(k), 403(b), 457, pension or profit sharing plan), it may have made payments to beneficiaries who were improperly designated with no consent of the same-sex spouse. What is the responsibility of the employer to reconsider what has happened in the past?

4. Plan Loans in a Plan Subject to QJSA Rules. If an employer maintains a retirement plan that offers participant plan loans, it may have permitted participant loans to employees with same-sex spouses in violation of the QJSA Rules. Should the employer obtain the same-sex spouse's consent with respect to any outstanding loan?

Action Steps

An employer has always been permitted to extend coverage and benefits to same-sex partners, and Windsor does not change that ability. For an employer that has extended coverage and benefits to same-sex partners, whether by marriage, civil union, civil partnership, or affidavit of relationship, the significant changes (that only apply to married same-sex spouses) are: 1) the taxation of health and welfare benefits; and 2) the treatment as a spouse under the employer's retirement plans. With respect to taxation of the health and welfare benefits for same-sex spouses, an employer should review all of the payroll system changes that will be required. For some employers, this may be a major undertaking, but for others, it is a fairly simple change. With respect to the employer's retirement plans, this change will probably require amendments to some or all of the employer's employee benefit plan documents and summary plan descriptions. For an employer that has not extended coverage to same-sex partners and their dependents, each of the employer's plans must be examined to determine which benefits must be offered to the same-sex spouses of its employees.

Conclusion

Regardless of approach with respect to domestic partner benefits, employers should start the process to identify the provisions of its benefit plans that may require analysis and possible change.

Ren'e W. O'Rourke is a Shareholder at Greenberg Traurig, LLP, resident in the Denver office. Phone: 303-572-6544. E-mail: [email protected].

BREAKING NEWS: After we went to press with this issue, the Treasury Department and IRS announced that legally married same-sex couples will be treated as married couples for federal tax purposes. This tax treatment will apply even if a couple lives in a state that does not recognize same-sex marriage so long as they were married in a state that does.

The guidance, stemming from the Supreme Court ruling this summer that overturned the Defense of Marriage Act, says same-sex couples can begin filing tax returns as “married filing jointly” or “married filing separately” for the 2013 tax year.

“Today's ruling provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide. It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve,” Treasury Secretary Jack Lew said in a statement.

[Editor's Note: We will have an updated version of this article reflecting the above development next week.]

On June 26, 2013, the U.S. Supreme Court, in United States v. Windsor, ruled that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional.' Section 3 of DOMA provides that in determining the meaning of any U.S. statute, ruling, regulation, or interpretation, 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 ruling specifically states that the opinion and its holding are confined to lawful marriages, and therefore does not specifically apply to civil unions, civil partnerships, or unions for which similar statutory or judicial rights are granted.

Based on the announcement by Office of Personnel Management (OPM) with respect to benefits for employees of the federal government, it is not unlikely that any guidance from the IRS or DOL will recognize same-sex marriages, but will not recognize civil unions or civil partnerships.' Thus, the current complex taxation rules will continue to apply to any employee with a same-sex partner who does not have a marriage certificate.

What Windsor Didn't Do

Section 2 of DOMA was not at issue in the Windsor case. Section 2 allows States to refuse to recognize same-sex marriages performed under the laws of other States, and presumably same-sex marriages performed under the laws of other countries.Thus, the ruling does not address the recognition of same-sex marriages in a jurisdiction performed outside a couple's state of residence.' Some statutory and regulatory provisions apply based on married status determined under the laws of the state of residence, and some provisions apply based on whether a lawful marriage certificate exists under the laws of the state of the ceremony.

Generally, for employee benefit plan purposes, ERISA and the tax code specifically reference “marriage under state law” without a specific reference to the state of residence or the ceremony state. Thus, based on the announcement by OPM with respect to benefits for employees of the federal government, it is not unlikely that guidance from the IRS and DOL will specifically permit or require employee benefit plans to recognize same-sex marriages based on the existence of a lawful marriage certificate, regardless of whether the employee's state of residence would recognize the marriage. Today, 13 states (California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington), the District of Columbia, and some foreign countries recognize marriages between same-sex couples.

What Has Clearly Changed

Until guidance is issued from the IRS and DOL, it remains unclear whether an employee benefit plan can or must recognize a same-sex marriage that was performed other than in the state of the employee's residence if the employee's state of residence does not recognize the marriage. It is clear that an employee benefit plan must recognize an employee's same-sex marriage if the employee's state of residence recognizes the employee's same-sex marriage. For those employees for whom the employee's state of residence recognizes the employee's same-sex marriage, the employer's employee benefit plans must recognize the employee's same-sex marriage in the same manner as an opposite-sex marriage. For example:

• The employer portion of the cost of same-sex spousal medical, dental, and vision coverage will no longer be included in income.
• Medical flexible spending accounts (FSAs), Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs) can be used for a same-sex spouse's qualified health expenses.
• The employee's portion of spousal medical, dental, and vision coverage can be paid on a pre-tax basis through a cafeteria (or Code ' 125) plan.
• Same-sex marriage, divorce or change in employment of the same-sex spouse will constitute a change in status allowing changes in cafeteria plan elections.
• The same-sex spouse has HIPAA special enrollment rights with respect to group health plans.
• The same-sex spouse has the right to COBRA upon divorce and an independent right to COBRA coverage on employee's loss of coverage on termination of employment or reduction in hours.
• A defined contribution plan (such as a profit sharing plan or 401(k) plan) must provide that the same-sex spouse is the employee's beneficiary unless the same-sex spouse consents to a different beneficiary.
• For purposes of the minimum required distributions at age 70', qualified retirement plans, 403(b) plans, IRAs and governmental 457(b) plans must treat a same-sex spouse as a spouse (for example, distributions upon death no longer have to be made within five years or commence within one year of death, and can instead begin when spouse would have attained 70').
• More favorable spousal rollover rules for distributions from qualified retirement plans, 403(b) plans, IRAs and governmental 457(b) plans upon death will apply to a same-sex spouse.
• A defined benefit plan (and certain defined contribution plans) must provide a qualified pre-retirement survivor annuity and qualified joint and survivor annuity (QJSA) to a same-sex spouse.
• Retirement Plans that are subject to the QJSA requirements and offer plan loans must obtain the same-sex spouse's consent to the loan.
• Qualified retirement plans must honor a qualified domestic relations order (QDRO) in favor of a same-sex spouse.

Effective Date and Retroactivity

Since Section 3 of DOMA was ruled unconstitutional, there is no clear answer as to the effective date of the change because declaring a law unconstitutional means that the law was never valid.' While guidance from the agencies may be forthcoming, it is unlikely any guidance will have specific rules for every situation as to how far back an employer must go to make any required changes. For example, consider the following:

1. Health Benefits Taxation. With respect to the taxation of health benefits for an employee whose coverage included a same-sex domestic partner, will the employee be permitted to file a claim for refund of the federal income and FICA taxes paid?' With respect to changes in the taxation of health benefits for 2013, it seems clearer that an employer should eliminate taxation of those health benefits for all of 2013. Thus, employers should begin to consider what changes will be needed to their payroll systems to change the tax treatment for all of 2013.' It may be prudent to wait until closer to the end of 2013 to take action to see if the IRS issues guidance.

2. Pension Commencement. If an employer has a defined benefit pension plan, any pension commencements after Windsor should take into account a same-sex spouse in the same manner as an opposite-sex spouse (for example, actuarial factors used and offers of qualified joint and survivor annuities). However, the question remains as to whether plans will be required to retroactively offer any options not available to same-sex spouses and make changes to existing elections and benefit calculations to take into account the changes required by Windsor. Similarly, if qualified pre-retirement survivor annuities have been denied to same-sex spouses, will employers be required to reconsider and change those decisions?

3. Payments to Beneficiaries. If an employer maintains a retirement plan (such as a 401(k), 403(b), 457, pension or profit sharing plan), it may have made payments to beneficiaries who were improperly designated with no consent of the same-sex spouse. What is the responsibility of the employer to reconsider what has happened in the past?

4. Plan Loans in a Plan Subject to QJSA Rules. If an employer maintains a retirement plan that offers participant plan loans, it may have permitted participant loans to employees with same-sex spouses in violation of the QJSA Rules. Should the employer obtain the same-sex spouse's consent with respect to any outstanding loan?

Action Steps

An employer has always been permitted to extend coverage and benefits to same-sex partners, and Windsor does not change that ability. For an employer that has extended coverage and benefits to same-sex partners, whether by marriage, civil union, civil partnership, or affidavit of relationship, the significant changes (that only apply to married same-sex spouses) are: 1) the taxation of health and welfare benefits; and 2) the treatment as a spouse under the employer's retirement plans. With respect to taxation of the health and welfare benefits for same-sex spouses, an employer should review all of the payroll system changes that will be required. For some employers, this may be a major undertaking, but for others, it is a fairly simple change. With respect to the employer's retirement plans, this change will probably require amendments to some or all of the employer's employee benefit plan documents and summary plan descriptions. For an employer that has not extended coverage to same-sex partners and their dependents, each of the employer's plans must be examined to determine which benefits must be offered to the same-sex spouses of its employees.

Conclusion

Regardless of approach with respect to domestic partner benefits, employers should start the process to identify the provisions of its benefit plans that may require analysis and possible change.

Ren'e W. O'Rourke is a Shareholder at Greenberg Traurig, LLP, resident in the Denver office. Phone: 303-572-6544. E-mail: [email protected].