6 health care trends for 2014

Originally posted by EBA http://eba.benefitnews.com

2013 was a pinnacle year in health care with the opening of the Affordable Care Act’s health care exchanges. But what can we expect in 2014? EBA spoke with experts across the spectrum to find out.

1. Complying with the ACA

The Affordable Care Act will continue to have a lasting impact into 2014. With the employer mandate pushed off and the penalties delayed as well, brokers will spend most of 2014 making sure their clients are complaint for 2015, says Mark S. Gaunya, principal at Borislow Insurance.

2. Losing coverage

In addition to focusing on compliance in 2014, Gaunya believes that many people will be in for a big surprise on Jan. 1 when “millions wake up and can’t see their doctor.” Gaunya predicts that many people who had coverage will lose it — 110,000 alone in his home state of Massachusetts — and some won’t even realize it until they go to the doctor.

3. Health care eligibility issues

With the ACA and Windsor decision on DOMA, employment lawyer Keith R. McMurdy of Fox Rothschild LLP believes many plan sponsors in 2014 are going to have problems with plan eligibility definitions. “Lots of employers don't really remember that changing eligibility and participation requirements requires an update of plan documents, revisions to SPDs and summaries of material modification,” he says. “I think that as the year progresses between litigation and EBSA audits we are going to see a lot of plans that have conflicting language over how they are being administered. “Plan sponsors that don't do complete review of these eligibility rules are going to find themselves in a world of hurt,” he adds.

4. Uneven risk pool hurts carriers

Insurance carriers whose plans are sold through the exchanges will issue earnings reports much worse than average in 2014, predicts Thom Mangan, CEO of United Benefit Advisors, due to the failure to enroll the young and healthy. Mangan says that after that happens the federal government will offer “some financial assistance to insurance carriers but not enough to make them whole.”

5. A small rise in health care costs

In 2014, the medical cost trend is estimated to be 6.5% by PricewatehouseCoopers Health Research Institute — one full percentage point below 2013’s estimate. After accounting for benefit design changes, such as higher deductibles, the net growth rate will be 4.5% in 2014, pWc predicts.

6. A request to drop coverage

In 2014, individual employees will realize they can get individual health coverage for less than their employer's group health plan, says Rick Lindquist, president of Zane Benefits Inc. “As a result, employees will start asking their employers to drop coverage, which will cause the small businesses health insurance market to implode in favor of defined contribution health benefits,” he says.

 

 

 


IRS eases same-sex health care tax break rules

Originally posted December 17, 2013 by Allen Greenberg on http://www.benefitspro.com

Thanks to last-minute action by the IRS, employee benefits administrators this year will have one more important change to communicate to employees as soon as possible: legally married same-sex couples can claim tax benefits this year if they’re enrolled in a flexible spending account, health care savings account or cafeteria plan.

The IRS – responding to the Supreme Court’s ruling in June invalidating part of the Defense of Marriage Act – said plans also are able to allow a midyear election change for participants marrying a same-sex spouse after the so-called Windsor decision.

Although it’ll mean more work, IRS Notice 2014-1 shouldn’t be a big surprise to HR managers. In August, the government said same-sex couples will be viewed as married for federal tax purposes, regardless of whether their marriages were recognized by the state in which they lived.

Carol Calhoun, a Washington, D.C., based attorney and former IRS official, said employers will need to move quickly to take advantage of relief granted under the latest guidance.

Calhoun said employees can use benefits remaining in their 2013 FSA accounts for same-sex spousal benefits, even in the case of FSAs set up as self-only FSAs.

“This information obviously needs to be communicated to those responsible for processing FSA benefits,” she said in a post on her firm’s website.

Employers, she wrote, also can now correct inadvertent overwithholding or underwithholding due to the recognition of an employee’s marital status, “but only if they act quickly to do so before the end of the year.”

The IRS notice will affect the amount reportable as income on W-2s, she said, so it’s important for HR departments to be aware of the new guidance as soon as possible.

Retirement plan sponsors are still awaiting IRS guidance on whether they will be compelled to retroactively apply the DOMA decision in calculating spousal and other benefits to same-sex partners.

Here are excerpts from the latest notice, offered by the IRS in Q&A form:

Question: If a cafeteria plan participant was lawfully married to a same-sex spouse as of the date of the Windsor decision, may the plan permit the participant to make a mid-year election change on the basis that the participant has experienced a change in legal marital status?

Answer: Yes. A cafeteria plan may treat a participant who was married to a same-sex spouse as of the date of the Windsor decision (June 26, 2013) as if the participant experienced a change in legal marital status for purposes of Treas. Reg. § 1.125-4(c).

Accordingly, a cafeteria plan may permit such a participant to revoke an existing election and make a new election in a manner consistent with the change in legal marital status. For purposes of election changes due to the Windsor decision, an election may be accepted by the cafeteria plan if filed at any time during the cafeteria plan year that includes June 26, 2013, or the cafeteria plan year that includes December 16, 2013.

A cafeteria plan may also permit a participant who marries a same-sex spouse after June 26, 2013, to make a mid-year election change due to a change in legal marital status.

Q: May a cafeteria plan permit a participant with a same-sex spouse to make a midyear election change under Treas. Reg. § 1.125-4(f) on the basis that the change in tax treatment of health coverage for a same-sex spouse resulted in a significant change in the cost of coverage?

A
: A change in the tax treatment of a benefit offered under a cafeteria plan generally does not constitute a significant change in the cost of coverage for purposes of Treas. Reg. § 1.125-4(f). Given the legal uncertainty created by the Windsor decision, however, cafeteria plans may have permitted mid-year election changes under Treas. Reg. § 1.125-4(f) prior to the publication of this notice.

Q: When does an election made by a participant in connection with the Windsor decision take effect?

A
: An election made under a cafeteria plan with respect to a same-sex spouse as a result of the Windsor decision generally takes effect as of the date that any other change in coverage becomes effective for a qualifying benefit that is offered through the cafeteria plan.

With respect to a change in status election that was made by a participant in connection with the Windsor decision between June 26, 2013 and Dec. 16, 2013, the cafeteria plan will not be treated as having failed to meet the requirements of section 125 or Treas. Reg. § 1.125-4 to the extent that coverage under the cafeteria plan becomes effective no later than the later of (a) the date that coverage under the cafeteria plan would be added under the cafeteria plan’s usual procedures for change in status elections, or (b) a reasonable period of time after Dec. 16, 2013.

The rules set forth (in the questions above) are illustrated by the following examples:

Example 1. Employer sponsors a cafeteria plan with a calendar year plan year.

Employee A married same-sex Spouse B in October 2012 in a state that recognized same-sex marriages. During open enrollment for the 2013 plan year, Employee A elected to pay for the employee portion of the cost of self-only health coverage through salary reduction under the cafeteria plan. Employer permits same-sex spouses to participate in its health plan. On Oct. 5, 2013, Employee A elected to add health coverage for Spouse B under Employer’s health plan, and made a new salary reduction election under the cafeteria plan to pay for the employee portion of the cost of Spouse B’s health coverage. Employer was not certain whether such an election change was permissible, and accordingly declined to implement the election change until the publication of this notice.

After publication of this notice, Employer determines that Employee A’s revised election is permissible as a change in status election in accordance with this notice. Employer enrolls Spouse B in the health plan as of Dec. 20, 2013, and begins making appropriate salary reductions from the compensation of Employee A for Spouse B’s coverage beginning with the pay period starting Dec. 20, 2013. The cafeteria plan is administered in accordance with this notice.

Example 2. Same facts as Example 1, except that Employee A submitted the election to add health coverage for Spouse B under Employer’s cafeteria plan on Sept. 1, 2013. Prior to publication of this notice, Employer implemented the election change and enrolled Spouse B in the health plan as of Oct. 1, 2013, and began making appropriate salary reductions from the compensation of Employee A for Spouse B’s coverage beginning with the pay period starting Oct. 1, 2013. The cafeteria plan was administered in accordance with this notice.

Q: How does the Windsor decision affect the tax treatment of health coverage for a same-sex spouse in the case of a cafeteria plan participant who had been paying for the cost of same-sex spouse coverage on an after-tax basis?

A: In the case of a cafeteria plan participant who elected to pay for the employee cost of health coverage for the employee on a pre-tax basis through salary reduction under a cafeteria plan and also paid for the employee cost of health coverage for a same-sex spouse under the employer’s health plan on an after-tax basis, the participant’s salary reduction election under the cafeteria plan is deemed to include the employee cost of spousal coverage, even if the employer reports the amounts as taxable income and wages to the participant. Accordingly, the amount that the participant pays for spousal coverage is excluded from the gross income of the participant and is not subject to federal income or federal employment taxes. This rule applies to the cafeteria plan year including Dec. 16, 2013, and any prior years for which the applicable limitations period under section 6511 has not expired.

 


8 things employers must do to comply with post-DOMA rules

Originally posted November 21, 2013 by Paula Aven Gladych on http://www.benefitspro.com

Employers need to ensure their retirement plans are in compliance with new rules regarding same-sex marriage.

With the Supreme Court’s decision in June to strike down a key provision of the Defense of Marriage Act allowing the federal government to recognize same-sex marriages and subsequent clarification by the IRS and the Department Labor, many plan sponsors now have to recognize same-sex couples when it comes to retirement benefits.

Only 14 states and the District of Columbia allow same-sex marriage. But according to new rules which went into effect in mid-September, same-sex couples are entitled to all of the federal rights entitled to opposite sex couples, including workplace benefits —even if the couple resides in a state that doesn’t recognize same-sex marriage.

According to Laura Pergine and Janet Luxton of Vanguard Strategic Retirement Consulting, there are eight things plan sponsors must do to make sure their retirement plans are in compliance post-DOMA:

1. Review plan documents.Vanguard recommends that plan sponsors sift through plan documents to determine if there is a definition of “spouse.” If a definition is there, they need to make sure it is compliant. The company said that plan sponsors also should review provisions in their documents that refer to domestic partnerships or civil unions.

2. Review marital status when it comes to beneficiary determination. If a plan participant who is legally married to a same-sex spouse dies, but his beneficiary designation is for someone he isn’t married to, that person may not receive the promised benefits unless the same-sex spouse waives his spousal rights.

3. Review qualified domestic relations procedures.Legally married same-sex couples have the same rights and obligations as opposite-sex couples if their marriage is dissolved. Qualified Domestic Relation Order procedures need to be reviewed to make sure there are no gender-specific references. If there are, they should be removed, Vanguard said.

4. Hardship withdrawals for same-sex spouses are now available.Plan sponsors need to follow the same rules regarding hardship withdrawals as those that apply to opposite-sex spouses.

5. Required minimum distributions.Gender-specific references to required minimum distributions in plan documents need to be removed. Spouses have more options regarding the treatment of distributions received as beneficiary payments.

6. Gender-specific references to rollovers in plan documents or distribution forms need to be removed. Spouses have more flexibility than non-spouses in how they treat rollover distributions, according to Vanguard.

7. Gender-specific references should be eliminated from participant communications. Plan sponsors should consider targeted communication to those employees most likely affected by these changes. Same-sex couples should be reminded to update their beneficiary designations.

8. Previous payment/Denial of benefits based on marital status. The IRS plans to issue guidance on whether or not same-sex couples who were denied an annuity benefit prior to the DOMA decision can now receive that benefit because of the Supreme Court decision.

 


Shutdown stalls remaining DOMA guidance

Originally posted October 10, 2013 by Andrea Davis on ebn.benefitnews.com

While much attention has been focused on the federal government shutdown and its effect on Affordable Care Act regulations, employers are still awaiting guidance on another key piece of legislation with benefits plan implications, the Defense of Marriage Act.

“The good news is the most critical guidance has already been issued,” says Todd Solomon, partner in the employee benefits practice of Will McDermott & Emery.  “The IRS and DOL have already come out with their notices that explain the state of celebration rule for federal tax purposes so we know the way forward for plan administration.”

Plan sponsors, however, are still awaiting federal guidance on two key issues: retroactivity and the deadline for plan amendments.

“The retroactivity is a bigger issue because plans can and probably will be getting claims with or without the IRS guidance,” says Solomon. “The theory was that the IRS was going to address what employers had to do with retroactivity, and employers were going to hold their breath and hope nothing came with respect to retroactive claims until the IRS guidance came out.”

A delay in the guidance will only affect employers if they get claims for retroactive benefits, says Solomon, with the most likely scenario being a claim for a survivor annuity within a pension plan.

“If a same-sex employee died six months ago, for example, and the plan didn’t pay a survivor benefit to the same-sex spouse, the spouse can make a claim. The plan has to decide whether it’s going to pay that benefit and there’s no clear answer right now on whether the plan is required to,” he says.

“Plans without guidance are in a bit of a box — on the one hand, you could say ‘just pay,’ because that makes the issue go away but, of course, just paying costs money to the trust and if it’s not something that’s required under the terms of the plan, money should never leave a retirement plan trust.”

The IRS also needs to issue guidance about a deadline for when plans need to revise their definition of the term ‘spouse.’

“Absent guidance, it would need to be done by the end of the year,” says Solomon. “If they [federal agencies] want to extend that, they’d need to do that fairly quickly. … it’s not hard guidance to issue so I would guess the shutdown should not impact that too much as long things don’t go on too long.”

Following the Supreme Court’s decision striking DOMA down last June, the Internal Revenue Service and Department of Labor issued regulations adopting a state-of-marriage approach — anyone who is legally married in a state or country recognizing same-sex marriage is now treated exactly the same as an opposite-sex spouse for all qualified plan purposes, including the taxation of medical, dental and vision benefits.

 


All Legal Same-Sex Marriages Will Be Recognized for Federal Tax Purposes

Originally published on http://www.treasury.gov

Ruling Provides Certainty, Benefits and Protections Under Federal Tax Law for Same-Sex Married Couples

WASHINGTON — The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

“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,” said Secretary Jacob J. Lew. “This ruling also assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change.”

Under the ruling, same sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011, and 2012. Some taxpayers may have special circumstances (such as signing an agreement with the IRS to keep the statute of limitations open) that permit them to file refund claims for tax years 2009 and earlier.

Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

How to File a Claim for Refund

Taxpayers who wish to file a refund claim for income taxes should use Form 1040X, Amended U.S. Individual Income Tax Return.

Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement.

For information on filing an amended return, go to Tax Topic 308, Amended Returns athttp://www.irs.gov/taxtopics/tc308.html or the Instructions to Forms 1040X and 843. Information on where to file your amended returns is available in the instructions to the form.

Future Guidance

Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this Revenue Ruling.

Other agencies may provide guidance on other federal programs that they administer that are affected by the Code.

For Revenue Ruling 2013-17, click here​.

For Frequently Asked Questions, click here.

For registered domestic partners who live in community property states, click here for Publication 555, Community Property.

Treasury and the IRS will begin applying the terms of Revenue Ruling 2013-17 on September 16, 2013, but taxpayers who wish to rely on the terms of the Revenue Ruling for earlier periods may choose to do so (as long as the statute of limitations for the earlier period has not expired).

 


IRS Recognizes All Same-Sex Marriages for Pretax Benefits

Originally posted by Stephen Miller on http://www.shrm.org

Under a new Internal Revenue Service ruling, employees who pay for employer-provided health insurance for their same-sex spouse may treat these costs as excludable from federal income taxes, even if they live in a state that doesn't recognize their marriage. State income taxes are another matter, however.

The U.S. Department of the Treasury and the IRS ruled on Aug. 29, 2013, that same-sex couples who were legally married will be treated as married for federal tax purposes, including the pretax treatment of a spouse's health insurance coverage, in all 50 states and the District of Columbia. Revenue Ruling 2013-17 applies, in other words, regardless of whether the couple now live in a state that recognizes same-sex marriage or a state that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the Supreme Court's June 26 decision in United States v. Windsor, which invalidated a key provision of the 1996 Defense of Marriage Act.

Revenue Ruling 2013-17 applies to all federal tax provisions in which marriage is a factor, including filing status, claiming personal and dependency exemptions, employee benefits, and claiming the earned income tax credit or child tax credit.

The ruling covers same-sex marriages entered into in one of the U.S. jurisdictions where such marriages are recognized as legally valid (sometimes referred to as the "state of celebration," as opposed to a couple's state of residency), as well as legal marriages performed in a foreign country. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

Employee Benefits Affected

Under the ruling, same-sex couples will be treated as married for all federal tax purposes. Those who purchased same-sex spouse health insurance coverage from their employer on an after-tax basis may treat the costs of that coverage as pretax and excludable from income (for federal income tax purposes; state income taxes may still apply).

"Same-sex spouses legally married anywhere no longer are taxed on health benefits coverage for their spouses and can pay premiums pretax, even if they live in a non-recognition state such as Florida, Texas, etc. This is a huge development and a relief for these employers and employees," Todd Solomon,a partner in the employee benefits practice group of McDermott Will & Emery LLP in Chicago, told SHRM Online.

"However, state taxation of benefits may continue to be quite complex, although it remains to be seen how states will treat this," Solomon added. "On the flip side, the guidance may not be welcome for employers who currently do not offer same-sex partner benefits because now they are legally required to offer benefits to same-sex spouses in all states" (see box below).

Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously taxed health insurance and other benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of Revenue Ruling 2013-17.

Other agencies may provide guidance on federal programs they run that are affected by the Internal Revenue Code, Treasury said.

Are Employers Obligated to Provide Equal Treatment?

Are employers located in states that do not recognize same-sex marriage now required to grant access to health care benefits to the spouses of employees in legal same-sex marriages (entered into elsewhere), if they grant health benefits to spouses in opposite-sex marriages?

"This is an open question, and only time and legal challenges—which there are certain to be—will tell," commented Todd Solomon of McDermott Will & Emery LLP.

Employers are not "required" to offer medical plan coverage to same-sex spouses the way they are required to offer a qualified joint and survivor annuity (QJSA) and a qualified preretirement survivor annuity (QPSA) in a pension plan because there are no similar statutory benefit mandates in the welfare plan context, Solomon explained. However, "employers that do not cover same-sex spouses will be very vulnerable to discrimination claims, in particular sex discrimination under Title VII. State and local discrimination claims are also possible, but private sector employers can likely argue that these claims are preempted by ERISA. But ERISA does not preempt Title VII."

While Title VII does not protect against sexual orientation discrimination, Solomon pointed out that guidance from the Equal Employment Opportunity Commission suggests that it might interpret this type of exclusion of same-sex spouses as sex discrimination, and therefore "an employer denying coverage to a same-sex spouse will be at risk for having to defend a costly sex discrimination lawsuit."

Retroactive Application and Refund Claims

The IRS set a prospective effective date for the ruling of Sept. 16, 2013. Legally married same-sex couples must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status.

For prior tax years still open under the statute of limitations, individuals who were in same-sex marriages may opt to file original or amended returns choosing to be treated as married for federal tax purposes. Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011, and 2012. Some taxpayers may have special circumstances (such as signing an agreement with the IRS to keep the statute of limitations open) that permit them to file refund claims for tax years 2009 and earlier.

With respect to retroactivity for prior years, "employers are still in wait-and-see mode until the IRS issues further guidance," said Solomon. "What we know is that employees and employers have the right—but not the obligation—to file for refund claims on past taxes paid on same-sex spouse benefits in open tax years—typically 2010, 2011, and 2012."

"Employers can expect to get requests from employees for corrected Form W-2s from these prior years," Solomon noted. "But what is not clear yet is how to handle cafeteria plan participation and tax reporting for prior years and whether adjustments need to be made. The IRS will be issuing more guidance on this issue as well as the retroactive impact of the guidance on retirement benefits that have or in many cases have not been paid to same-sex spouses."

Along with Revenue Ruling 2013-17, the IRS released two related sets of frequently asked questions and answers:

The IRS ruling "assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change,” Treasury Secretary Jacob J. Lew noted in a released statement.

 


10 post-DOMA tips for benefits managers

Originally posted by Dan Cook on http://www.benefitspro.com

When the U.S. Supreme Court ruled in United States v. Windsor that the federal government is required to recognize same-sex marriages performed in states that allow such marriages, benefits managers started dialing 911.

In an article posted on the Sutherland Asbill & Brennan website, attorneys Vanessa Scott, Carol Weiser, Joanna Myers and Mikka Gee Conway offer considerable guidance on how to amend a benefits plan to meet the implications of Windsor.

Their 10 tips should be read with the understanding that forward-looking plan managers will be anticipating that same-sex marriages will sooner or later be part of the domestic law landscape and will revise their plans accordingly. One major issue currently centers on the state in which a same-sex marriage was performed vs. the state where a same-sex couple resides. But again, assume that residence will eventually prevail for those couples married elsewhere.

Here are their 10 tips:

1. Generally, spousal provisions in an employer’s employee benefit plans, including qualified retirement plans, welfare plans and fringe benefit plans, should apply to same-sex spouses in the same manner as they are applied to opposite-sex spouses.

2. There may be an exception to the general rule above in the case of welfare plans and fringe benefits that define covered “spouses” by reference to the law of a state that does not recognize same-sex spouses or such plans that do not clearly define the term “spouse.” In these cases, plan administrators may still have the authority to interpret the term “spouse” to exclude same-sex spouses. However, it is unclear whether such interpretation might now be considered “arbitrary and capricious” if challenged in litigation following the Windsor decision.

3. Any plan or benefit policy amendment or interpretation that relates to spouses —including prospective verification of spousal status — should be applied to opposite-sex couples in the same manner as same-sex spouses.

4. Plans that do not currently offer spousal benefits at all will not be required to offer spousal benefits as a result of the Windsor decision.

5. For qualified retirement plans, there are implications for application of qualified joint and survivor annuity rules, Internal Revenue Code (Code) section 415 maximums, minimum required distributions, and qualified domestic relations orders. The implications for health plans include the need to offer COBRA to same-sex spouses.

6. Welfare plans that currently offer benefits to same-sex spouses of employees and impute income on the value of the benefit to the employee for federal tax purposes will no longer need to do so. This may require amendments to plan documents and communication materials.

7. Welfare plans that do not impute income on the value of benefits provided to same-sex spouses for state tax purposes in states that allow (or recognize) same-sex marriage will continue this practice. In states that do not allow (nor recognize) same-sex marriage, welfare plans will continue to impute income on the value of benefits provided to same-sex spouses for state tax purposes.

8. It is unclear whether the Windsor decision will have a retroactive impact. Guidance on this issue from federal agencies is anticipated in the coming days and weeks. However, a retroactive application by agencies, such as the Internal Revenue Service (e.g., if the Service reads the Code as if Section 3 of DOMA was never enacted) could be costly, even for plans that currently provide same-sex spousal benefits.

9. Employers will no longer be required to pay FICA taxes on the value of welfare benefits provided to a same-sex spouse. Employers that currently offer same-sex benefits should consider whether they should seek a refund for FICA taxes paid on those benefits during the past three years.

10. The Windsor decision does not require employers to recognize rights granted under “marriage-like” relationships, such as domestic partnerships and civil unions.

 


DOMA decision raises as many questions as answers

Originally posted on July 5 by Brian Magargle on http://ebn.benefitnews.com

The Supreme Court that struck down a key provision of the Defense of Marriage Act and required the federal government to recognize same-sex marriage will have far-ranging implications for employee benefit plans.

In 1996, Congress enacted the DOMA, which defined marriage as "only a legal union between one man and one woman as husband and wife. . . ." Last week's decision declared that section of DOMA to be unconstitutional, so couples that have married in states that recognize same-sex marriage are now entitled to the same federal protections and privileges that come with traditional marriage, including in the employee benefits arena. Pending additional federal guidance, employers and their advisers should now begin considering these issues and the benefit administrative areas affected.

Factual background of U.S. v. Windsor

In 1963, Edith Windsor and Thea Spyer met in New York City and began a long-term relationship. They registered as domestic partners when New York City provided that right to same-sex couples in 1993. In 2007, they traveled to Canada to be lawfully married under Canadian law since Ms. Spyer's health was deteriorating, but they continued to reside in New York City. The State of New York deemed their marriage to be valid because of the city ordinance recognizing domestic partnerships.

Ms. Spyer died in 2009 and left her entire estate to Ms. Windsor. Because DOMA denied federal recognition to same-sex spouses, Ms. Windsor did not qualify for the marital exemption from the federal estate tax. Without that exemption, Ms. Windsor paid more than $360,000 in estate taxes. She then filed suit against the Internal Revenue Service for a full refund by challenging the federal definition of marriage in DOMA, and her case eventually landed in the Supreme Court this year.

The Supreme Court's reasoning

In reaching its 5-4 decision, the court first noted that the definition and regulation of marriage has historically been treated as a state, not federal, matter. Since DOMA is a federal law, it affected marriages in all states, including those states which have opted to recognize same-sex marriage. The effect in those states was that the marriages of same-sex couples were valid under state law but invalid for purposes of all federal laws.

The court found the definition of marriage in DOMA to be unconstitutional because it violated basic due process and equal protection principles applicable to the federal government. Writing for the majority and joined by Justices Breyer, Ginsburg, Kagan, and Sotomayor, Justice Anthony Kennedy said that "[t]he avowed purpose and practical effect of the law here in question are to impose a disadvantage, a separate status, and so a stigma upon all who enter into same-sex marriages made lawful by the unquestioned authority of the States. Were there any doubt of this far-reaching purpose, the title of Act confirms it: The Defense of Marriage."

Issues and challenges for employee benefit plans

The Windsor decision has an impact on the application of more than 1,000 federal laws, including laws that apply to the administration of employee benefit plans, such as certain sections of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. Benefit plans of all types are now faced with significant decisions about how the Windsordecision will affect the treatment of same-sex spouses. These decisions will be especially difficult because currently there are no regulations or guidance as to what is considered legally correct treatment of same-sex spouses.

In the states where same-sex marriage is recognized, decisions will be more straightforward because benefit plan administrators should be able to treat same-sex spouses the same as all other married couples. Same-sex marriage is currently recognized in Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington state and the District of Columbia. Also, as of last Friday, California again recognizes same-sex marriage after a surprisingly fast decision by the U.S. Court of Appeals for the Ninth Circuit permanently refusing to enforce the state's Proposition 8 gay marriage ban. So, in these states, we expect benefit plan administrators to have a relatively easy transition for covered same-sex spouses.

The real challenges arise in situations like the following: a same-sex couple gets legally married in a state that recognizes same-sex marriage but then moves to a state which does not. What then? These situations will be especially complex because the Supreme Court struck down only the definition of marriage in DOMA, which was Section 3 of the law.Section 2 was not at issue in or affected by the Windsor decision, and it says that no state "shall be required to give effect to any public act, record, or judicial proceeding of any other state … respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other state … or a right or claim arising from such relationship." In other words, a state that does not recognize same-sex marriage is not required to recognize the legal marriage of a same-sex couple married in one of the jurisdictions listed above.

This tension between state laws for couples who move from one state to another will be felt by retirement plan administrators when determining beneficiary/survivor rights under 401(k) plans and other pension plans. Administrators for both self-funded and insured health plans will need to consider how to approach covering same-sex spouses as dependents of active employees, spousal COBRA obligations after a qualifying event, and structures of health flexible spending accounts. In addition, since health coverage for same-sex spouses is no longer a taxable benefit under the Internal Revenue Code, payroll taxes and withholdings will need to be reviewed and probably revised for same-sex couples.

Action points

Until guidance is issued in some form on the treatment of legally married same-sex spouses in other states where such marriages are not legal, employers and plan administrators should take a reasonable, good-faith approach applied on a consistent basis across all locations. Although it is impossible to know with any certainty, we expect that when the federal government does issue guidance, it will largely favor recognizing same-sex marriages for benefit plan purposes even in states in which such marriages are unlawful.

In any event, employers should start considering these issues now so that they will be as prepared as possible when employees ask questions or when an enrollment or benefits decision needs to be made for a same-sex couple. Once organizational decisions are made, then employers will need to review and possibly amend their plan documents and summary plan descriptions accordingly.

Constangy's ERISA/Employee Benefits Practice Group is continuing to study the Windsor decision and to monitor federal and state developments as they may affect the treatment of same-sex spouses under benefit plans. In the meantime, all employers and especially multi-state employers should begin discussing what issues they may be facing and identifying which plan administration areas will be affected by this major court decision.

Used with permission by Constangy, Brooks & Smith, LLP. Magargle is an attorney in the firm’s Columbia, S.C. office.

The firm has counseled employers on labor and employment law matters, exclusively, since 1946. A "Go To" Law Firm in Corporate Counsel and Fortune Magazine, it represents Fortune 500 corporations and small companies across the country. Its attorneys are consistently rated as top lawyers in their practice areas by sources such as Chambers USA, Martindale-Hubbell, and Top One Hundred Labor Attorneys in the United States, and the firm is top-ranked by the U.S. News & World Report/Best Lawyers Best Law Firms survey. More than 140 lawyers partner with clients to provide cost-effective legal services and sound preventive advice to enhance the employer-employee relationship. Offices are located in Alabama, California, Florida, Georgia, Illinois, Massachusetts, Missouri, New Jersey, North Carolina, South Carolina, Tennessee, Texas, Virginia and Wisconsin. For more information, visit www.constangy.com.


Supreme Court rulings raise standards for proving discrimination at work

Originally posted by Judy Greenwald on http://www.businessinsurance.com

Employers scored two victories before the U.S. Supreme Court last week that legal experts say will enable them to more effectively defend themselves in employment lawsuits.

In its 5-4 ruling in Maetta Vance v. Ball State University et al., the high court narrowed the definition of supervisor for purposes of discrimination cases.

And plaintiffs will find it more difficult to prove retaliation after the high court's 5-4 ruling inUniversity of Texas Southwestern Medical Center v. Nassar.

In Vance, the court held that an employee is a supervisor for purposes of vicarious liability under Title VII of the Civil Rights Act of 1964 only if he or she has the power to make “tangible” employment actions against the victim, such as hiring or firing. The court said even if there is no tangible employment action, the employer may escape liability by establishing it exercised reasonable care to prevent and correct any harassing behavior.

The court said in cases when co-workers are inflicting psychological injury, employees may still prevail by showing the employer was negligent in permitting the harassment to occur. Its majority ruling criticized the Equal Employment Opportunity Commission's broader definition of supervisor as a “study in ambiguity.”

The ruling, which affirmed a decision by the 7th U.S. Circuit Court of Appeals in Chicago, said, “Under the definition of "supervisor” that we adopt today, the question of supervisor status, when contested, can very often be resolved as a matter of law before trial.

“The elimination of this issue from the trial will focus the efforts of the parties, who will be able to present their cases in a way that conforms to the framework that the jury will apply.”

The case involved an African-American food worker's allegations that she was the victim of racially based harassment by a white female whom she identified as a supervisor.

Bernard J. Bobber, a partner with Foley & Lardner L.L.P. in Milwaukee, who was not involved in the case, said the court accepted the 7th Circuit's definition of a supervisor and rejected the EEOC's definition, which employers do not like because the agency's definition “leaves lots of room for argument” about who is a supervisor.

“It's a good decision for employers” and “should provide some bright rules in those jurisdictions that aren't already required to follow that particular test,” said Steve A. Miller, a partner with Fisher & Phillips L.L.P. in Chicago, who was not involved in the case.

In its 5-4 ruling in Nassar, which involved a charge of discrimination and retaliation by a physician of Middle Eastern origin, the court held that a defendant is not liable for an action if he would have taken the same action anyway for other, nondiscriminatory reasons. It rejected the standard that requires a plaintiff to prove only that discrimination was a motivating factor for an adverse employment action.

Lessening the causation rules in cases of wrongful employer conduct prohibited by Title VII of the Civil Rights Act of 1964 could “contribute to the filing of frivolous claims, which would siphon resources from efforts by employer, administrative agencies and courts to combat workplace harassment,” said the majority opinion, reversing a decision by a panel of the 5th U.S. Circuit Court of Appeals in New Orleans.

“This case is a true watershed development in that it presents a dramatic shift in the court's approach to retaliation claims,” said Gregory Keating, a shareholder with Littler Mendelson P.C. in Boston.

The court's ruling has “adopted a very strict test” for establishing causation, unlike several other cases decided by the court in recent years that made retaliation easier to establish, said Mr. Keating, who was not involved in the case.

Russell Cawyer, a partner with Kelly Hart & Hallman L.L.P. in Fort Worth, Texas, said, while the ruling will not reduce the number of retaliation charges filed by plaintiff attorneys, defendants will be more successful in having these cases dismissed.


DOMA ruling complicates benefits administration

Originally posted by Andrea Davis on http://ebn.benefitnews.com

The Supreme Court’s decision striking down the federal Defense of Marriage Act is being hailed as a huge victory for same-sex couples, but the ruling makes benefits administration for employers even more complicated than before.

“It’s not even crystal clear that anybody knows what the right legal answer is with respect to those people living in the 38 states that don’t recognize same-sex marriage,” says Todd Solomon, a partner in the employee benefits practice of McDermott, Will & Emery, and author of Domestic Partner Benefits: An Employer’s Guide. “It’s really easy in the other 12 states [that do recognize same-sex marriage] — that’s what we know — but we’ve got a huge, open $64,000 question with respect to the rest of the people. And that’s a big problem for employers. I think they’re going to be very puzzled and they’re going to want guidance from the IRS.”

The court decision notes there are over 1,000 federal laws containing provisions specifically applicable to spouses that will be affected by its ruling. At this point, the ruling makes it harder for multistate employers to administer benefits, believes Leslye Laderman, a principal in the Knowledge Resource Center with Buck Consultants.

“We don’t know, exactly, the full implications of the ruling,” she says. “In the Windsor case, the plaintiff, Edith Windsor, lived in New York. New York is a state that recognizes same-sex marriage and the court very much was looking at that, and that DOMA was stepping on the rights of states to regulate that. But it really isn’t clear from the ruling exactly what the implications are for someone who’s living in a state that does not recognize same-sex marriage. More guidance is needed.”

For employees who were married in states that recognize same-sex marriage and still reside there, however, the DOMA ruling “is a significant gain in rights both on the pension side and on the health benefits side,” says Solomon.

For others, the decision “leaves many questions to be resolved by subsequent regulation and undoubtedly litigation,” said George W. Schein, lawyer with Thompson Hine’s employee benefits and executive compensation practice, in a statement. “Conspicuously unresolved is the interplay between the states that recognize same-sex marriage and those that do not.”

Retirement plans

With respect to defined benefit plans, same-sex spouses will now be entitled to survivor annuity rights. “Say a participant turns 65 and retires under a pension plan, including a frozen plan, and their benefit was $1,000 a month. If they die and have a surviving spouse, the surviving spouse would get a benefit of $500 a month – at least half of the participant’s annuity – for the rest of their life,” explains Solomon. “That’s a significant survivor benefit.”

With the DOMA ruling, this survivor benefit also now applies to qualified pre-retirement survivor annuities. “If somebody dies pre-retirement – before they start drawing their pension – that means their surviving spouse gets at least 50% of their benefit for the [duration of the] surviving spouse’s life,” says Solomon.

Combined, these survivor annuity rights represent “a big gain for same-sex couples, a pretty significant benefit that they were previously typically excluded from,” says Solomon.

Under 401(k) plans, spouses are automatically deemed beneficiaries so the DOMA decision means same-sex spouses will now have beneficiary rights they weren’t previously entitled to.

Health plans

For self-funded employers, there’s never been an obligation to cover same-sex spouses, although many plans do, says Solomon. But because DOMA defined marriage as between one man and one woman, “a lot of employers relied on the DOMA definition and said ‘we’re only covering opposite-sex spouses under our plan,’” he says. With DOMA ruled unconstitutional, it now “gets very difficult for an employer [in any state] to deny coverage to a same-sex spouse in a self-funded plan.”

Self-insured plans will “really need to think about extending coverage to same-sex spouses or be at risk of discrimination claims,” says Solomon.

Insured plans, meanwhile, “are already accustomed to covering same-sex spouses in states that recognize same-sex marriage,” says Solomon. “But with respect to other states, to the extent they’re not extending coverage, they’ll have to extend coverage as well, presumably.”

Tax implications

Since DOMA’s been struck down, health coverage for same-sex partners will no longer be a taxable benefit under federal tax law. One of the important questions is whether the decision will have retroactive implications. “A lot of employers have structured their payroll taxes and benefit plan side of things in accordance with DOMA and will now need to think through what their reactions will be,” says Joanne Youn, an employee benefits attorney at Caplin & Drysdale.

“Many constitutional cases do have retroactive implications,” notes Solomon. “In terms of tax refunds, I think you could potentially see a number of employees filing for tax refunds for taxation of benefits, and you may see employers filing for Social Security tax refunds because employers pay payroll taxes on the income they impose on employees covering same-sex spouses.”

It’s not clear retroactivity applies as the Supreme Court did not specifically address it but “it’s an open question and one that I think will be pursued – how far does this go back and will employers see an uptick in claims for spousal death benefits, for example?” says Solomon.

Next steps

Solomon recommends four steps for employers:

1. Take stock. Look at what you do already for same-sex spouses, compare it to what’s legally required now and see what gaps exist. “Some employers are going to have small gaps and some are going to have fairly large gaps,” he says.

2. Figure out how to implement any new benefits as soon as possible. “Some of this presumably takes effect right now so, for example, putting in procedures so that if somebody with a same-sex spouse were to die tomorrow, how would you treat that? Make sure you understand the rules and have policies in place,” he says.

3. Get everything documented. “From a qualified benefit plan perspective, typically you have until the end of the year to make discretionary amendments and conforming amendments,” says Solomon. “The IRS might issue some guidance and give more time but, I would aim to amend plans by the end of this calendar year, for calendar-year plans, and certainly by the end of the plan year for other plans.”

4. Update tax policies and payroll procedures to start taxing benefits in accordance with the new rules. “Stop taxing the benefits for federal income tax purposes starting as soon as possible,” says Solomon.

“It’s hard because none of this is going to happen overnight but I think employers just have to do their best to get geared up to address seemingly quite a few issues,” says Solomon. “It’s a little more complicated now than it was before, actually.”

‘Don’t be first out the gate’

Before employers communicate anything to employees, it’s important to think through the issues “and not be the first one out of the gate with extensive communications on what this means,” says Solomon.

“The important thing is to not say too much until employers figure out how they’re going to handle some of the open questions,” he says. “What happens if someone is married in New York [which recognizes same-sex marriage] but lives in Florida [which does not recognize same-sex marriage]? Is the employer going to continue to tax them on the benefits, treating them as unmarried because they live in Florida? Or will they not tax the benefit because the state of ceremony should govern and that’s good enough? Employers need to make up their mind on that, and there’s no guidance to know what the legally correct answer is on that.”

Employers should expect questions, says Roberta Chevlowe, a senior counsel in Proskauer’s employee benefits, executive compensation and ERISA litigation practice center and a member of the firm’s DOMA taskforce. However, she cautions “employers will need to consider carefully the scope of the decision and various issues relating to the implementation and effective date of the decision with regard to these issues.”

COBRA, FMLA

The ruling could also have implications for spousal rights under other legislation, such as COBRA and the Family and Medical Leave Act.

“If someone’s living in a state that recognizes same-sex marriage and has a same-spouse, now the spouse will have full COBRA rights,” says Laderman. “What we don’t know is what happens in a state where they don’t recognize same-sex marriage? An employer can extend COBRA-like coverage to same-sex spouses even if the state doesn’t recognize the marriage but it does raise issues.”

Similarly, FMLA is a federal law and rights are extended to spouses. “Are employers required to [recognize same-sex spouses] in other states [that don’t recognize same-sex marriage]? We don’t know that, but an employer could certainly extend that type of coverage if it wanted to,” says Laderman.