United States: You've Acquired A New Qualified Retirement Plan? Time For A Compliance Check
Originally posted October 20, 2014 by Nancy Gerrie and Jeffrey M. Holdvogt of Mondaq Business Briefing, on www.ifebp.org.
In connection with a merger or acquisition, an acquiring company may end up assuming sponsorship of a tax-qualified retirement plan that covers employees of the acquired company. Basic due diligence on the plan likely was done during the acquisition. But if the plan will continue to be maintained following the acquisition, this is the perfect time to establish procedures to ensure that the numerous administrative and fiduciary requirements involved in maintaining a qualified retirement plan will continue to be met on an ongoing basis. Following is a brief summary of some key issues that a company should focus on after it assumes a new qualified retirement plan.
Review Compliance with Coverage and Nondiscrimination Testing
In order for the plan to retain its tax-qualified status, the Internal Revenue Code requires that a qualified retirement plan be tested periodically to ensure that it does not discriminate in favor of highly compensated employees. Two of the most important tests to be monitored are: (i) the coverage test, to ensure that the plan covers a stated minimum number of non-highly compensated employees on a controlled group (employer-wide) basis, and (ii) the nondiscrimination test, to ensure that the formula for determining the amount of contributions and benefits a particular participant receives does not discriminate in favor of highly compensated employees. Advance planning should be done to determine the impact of the acquisition on these tests, both for the new plan and any existing plans within the controlled group. Different rules may apply for determining which employees are highly compensated, depending on the type of transaction.
Become Familiar with the Plan's Investments and Investment Policy
The acquiring company, or more typically a committee appointed by the acquiring company, will have fiduciary responsibility for selecting the plan's investments, including the investment funds offered under a 401(k) or other individual account retirement plan. Plan fiduciaries, who likely will be newly appointed following the acquisition, must familiarize themselves with the fund lineup, obtain information to evaluate the funds and document how they monitor and select funds to ensure compliance with U.S. Department of Labor requirements. Plan fiduciaries also should familiarize themselves with the plan's written investment policy or guidelines, refer to the investment policy or guidelines when meeting to discuss changes to plan investments and update the policy or guidelines, as needed.
Understand Plan Fees and Revenue Sharing
New plan fiduciaries should carefully review any revenue-sharing arrangements related to the plan and understand the plan's use of so-called "12b-1 fees" and other revenue-sharing payments. Plan fiduciaries must understand the formula, methodology and assumptions used to determine the respective share of any revenue generated from plan investments by the plan's service provider. Plan fiduciaries also must monitor the arrangement and the service provider's performance to ensure that the revenue owed to the plan is calculated correctly and that the amounts are applied properly (for example, for payment of proper plan expenses or for reallocation to participants' plan accounts).
Review Consultant, Investment Manager and Service Provider Agreements
Qualified retirement plan fiduciaries typically have agreements with various consultants, investment managers and service providers that carry over following an acquisition. This is a good time to review these agreements, both to understand the service providers (and whether they are still needed) and to make sure plan fiduciaries are set up to properly monitor and select new service providers, as needed. In particular, plan fiduciaries should understand whether the consultant or advisor represents itself to be a fiduciary or co-fiduciary of the plan, whether the consultant or advisor maintains adequate insurance coverage, whether fees are reasonable and whether any conflicts of interest exist.
Ensure the Plan's Eligibility Provisions Reflect the New Controlled Group
The plan document will specify precise rules for employee eligibility. Following an acquisition, the acquiring company often must update the plan's eligibility provisions to reflect the new controlled group. In addition, with new administrators and new human resources personnel likely to be looking at the plan, this is an ideal time to make sure the plan is following the eligibility and enrollment rules set forth in the plan document, including: (1) eligibility for or exclusion of part-time employees; (2) proper classification of independent contractors; (3) adherence to hours-of-service counting rules or the elapsed-time alternative; (4) re-enrollment of rehired participants; and (5) for automatic enrollment plans, proper automatic enrollment for eligible employees on a timely basis.
Check the Plan's Definition(s) of Compensation
A plan's definition of compensation is used for a variety of important purposes, including the calculation of an employee's allocation in a defined contribution plan or benefit accruals in a defined benefit plan, adherence to limitations on allowable compensation and performing nondiscrimination testing. The plan document must specify precise definitions for applicable compensation for each purpose. Problems frequently arise following an acquisition because the payroll provider may change or key personnel who understood how compensation was applied under the plan may be gone. Also, the transaction agreement may require the continuation of certain benefit levels for a period of time, which in practice may require that the plan continue to apply the same definition of eligible compensation as before the transaction. Plan administrators should review payroll codes against the plan's definition of compensation and make adjustments to either the plan or the payroll codes, as needed.
Review the Distribution Paperwork
The acquiring company will usually update the plan's summary plan description and employee communications to reflect the new employer. However, distribution paperwork, including benefit election and rollover forms that the employee must complete, as well as descriptions of optional forms of benefits and other required disclosures, is often overlooked in the due diligence and transition process. If election forms are not periodically reviewed and updated, the plan may fail to provide all the correct options (for example, installments, annuities and lump sums, where available) or fail to require spousal consent for distributions, where it is required under plan rules.
Update ERISA Fidelity Bonds and Fiduciary Insurance Coverage
One of the most common failures noted by the Department of Labor during audits is a plan's maintenance of an Employee Retirement Income Security Act (ERISA) fidelity bond. ERISA generally requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan be bonded (for at least 10 percent of the amount of funds he or she handles, subject to a $500,000 maximum per plan for plans that do not hold employer securities) to protect from risk of loss due to fraud or dishonesty on the part of persons who "handle" plan funds or other property. The period after an acquisition is an excellent time to make sure the plan maintains appropriate bonds, as well as to make sure the company is adequately protected with fiduciary insurance coverage, which may be with the same insurer as the fidelity bond.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Federal Employment Law Update – October 2014
Source: ThinkHR.com
FAQs about Affordable Care Act Implementation Part XXI
On October 10, 2014, the Departments of Labor, Health and Human Services (HHS), and the Treasury jointly released FAQs about Affordable Care Implementation (Part XXI). The FAQS update prior guidance on cost-sharing limitations for plans using “reference-based pricing.”
The new FAQS set forth specific factors the departments will consider when evaluating whether a non-grandfathered plan that utilizes reference-based pricing (or similar network design) is using a reasonable method to ensure that it provides adequate access to quality providers at the reference-based price.
IRS – 2015 Per Diem Rates for Travel Expense Reimbursements
On October 6, 2014, the IRS released Notice 2014-57. This annual notice provides the 2014-2015 special per diem rates for taxpayers to use to substantiate ordinary and necessary business expenses incurred while traveling away from home, specifically:
- The special transportation industry meal and incidental expenses rates (M&IE).
- The rate for the incidental expenses only deduction.
- The rates and list of high-cost localities for purposes of the high-low substantiation method. Taxpayers using the rates and list of high-cost localities provided must comply with Rev. Proc. 2011-47, I.R.B. 2011-42, 520.
Transportation industry rates
The special M&IE rates for taxpayers in the transportation industry are $59 for any locality of travel in the continental United States (CONUS) and $65 for any locality of travel outside the continental United States (OCONUS).
Incidental expense only rate
The rate for any CONUS or OCONUS locality of travel for the incidental expenses only deduction is $5 per day.
High-low substantiation method
For purposes of the high-low substantiation method, the per diem rates are $259 for travel to any high-cost locality and $172 for travel to any other locality within CONUS. The amount of the $259 high rate and $172 low rate that is treated as paid for meals is $65 for travel to any high-cost locality and $52 for travel to any other locality within CONUS. The per diem rates in lieu of the meal and incidental expenses only substantiation method are $65 for travel to any high-cost locality and $52 for travel to any other locality within CONUS.
High-cost localities changes
San Mateo, Foster City, Belmont, Sunnyvale, Palo Alto and San Jose, California; Glendive and Sidney, Montana; and Williston, North Dakota, have been added to the list of high-cost localities appearing in Notice 2013-65, I.R.B. 2013-44, 440. The portion of the year in which they are high-cost localities has changed for Sedona, Arizona; Napa, California; Vail, Colorado; Fort Lauderdale, Florida; Miami, Florida; and Philadelphia, Pennsylvania. The following localities have been removed from the list of high-cost localities: Yosemite National Park, California; San Diego, California; and Floral Park, Garden City, and Great Neck, New York.
Effective date
The guidance is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only that are paid to any employee on or after October 1, 2014, for travel away from home on or after October 1, 2014. For purposes of computing the amount allowable as a deduction for travel away from home, this guidance is effective for meal and incidental expenses or for incidental expenses only paid or incurred on or after October 1, 2014.
Read IRS Notice 2014-57
Executive Order 13658 – Final Rule
On February 12, 2014, President Obama signed Executive Order 13658, Establishing a Minimum Wage for Contractors, to raise the minimum wage to $10.10 for all workers on federal construction and service contracts. The Executive Order directed the Department of Labor to issue regulations to implement the new federal contractor minimum wage.
On October 1, 2014, the department announced a Final Rule implementing the provisions of Executive Order 13658. Key provisions of the final rule include:
- It defines key terms used in the Executive Order, including contracts, contract-like instruments, and concessions contracts.
- It provides guidance for contractors on their obligations under the Executive Order.
- It establishes an enforcement process that should be familiar to most government contractors and will protect the right of workers to receive the new $10.10 minimum wage.
- It confirms that approximately 200,000 workers will benefit from the Executive Order.
Executive Order 13658 applies to new contracts and replacements for expiring contracts with the federal government that result from solicitations issued on or after January 1, 2015, or to contracts that are awarded outside the solicitation process on or after January 1, 2015.
The Final Rule will be published in the October 7, 2014 Federal Register.
Read the Final Rule
Read the Fact Sheet on the Final Rule
Read the FAQS on the Final Rule
Is it time for a checkup for your client's 401(k) plan?
As we approach the end of the plan year for most plans, now is a good time for plan administrators and plan sponsors to give their 401(k) plans a quick once over to see if everything is properly in place. The IRS even provides a 401(k) plan checklist with some suggested corrective mechanisms that can be taken to bring plans into compliance.
A good starting place for a compliance tune up is to see if you can answer some basic questions about your plan:
- Who are the trustees?
- Who is the plan administrator?
- Who are the outside service providers and how often are they contacted?
- What are the plan’s eligibility rules and who is responsible for verifying them?
- How are participants notified of eligibility?
- How is plan documentation distributed?
- Where are the plan records kept?
- Who is responsible for preparing and filing the form 5500?
After you get past these, some basic questions about plan administration come into play:
- Who keeps track of contributions and limits?
- How does the plan define “compensation”?
- What is the vesting schedule?
- Are there required contributions from the employer?
- Who is responsible for the discrimination testing?
- Does the plan permit loans and how are they tracked?
- Who is responsible for reporting to participants?
- How are distributions made and who is the contact person?
The reason I bring this topic up is that I was recently working with a client who had one person who was solely responsible for benefit administration. Unfortunately that person passed away suddenly and no other person in the organization could answer any questions about the 401(k) plan. Although it seems like the above information is simple to collect, the company still spent hours and hours recreating the plan history because they neglected to keep a record of how the answers to these questions had changed over the years.
Think of your 401(k) plan as a well maintained car. It needs a check up on a regular basis to keep running smoothly. You have to keep records of what was done and you have to know where the important information is if you need it. Just like your car, you hope your 401(k) plan never breaks down. But in anticipation of a future problem, it is worthwhile to stop and make a record of the responsibility for plan administration and the current status of the plan. That way it will be easier to make repairs if they ever become needed.
IRS drafts instructions for ACA reporting requirements
Originally posted September 11, 2014 by Keith R. McMurdy on https://ebn.benefitnews.com.
They promised they would be coming and now they have. On Aug. 28, the Internal Revenue Service issued draft instructions for Forms 1094-C and 1095-C and Forms 1094-B and 1095-B, which I provided in my July 31 entry.
These forms were provided in draft format and they are used to satisfy Affordable Care Act’s “information reporting requirements.” We also got draft instructions for Form 1095-A that relates to the statement about the Health Insurance Exchange Marketplace. The IRS has indicated that it will finalize the forms and instructions in 2014. On top of that, they issued some FAQs that address the reporting requirements.
As a starting point, the FAQs provide that some short-term penalty relief will be available for incomplete or incorrect information returns that are filed (or employee statements provided to employees) in 2016 for coverage offered, or not offered, in 2015. Under this relief, the IRS will not impose penalties on employers that can demonstrate that they made good faith efforts to comply with the information reporting requirements. This relief applies to returns and statements filed and furnished in 2016 to report offers of coverage in 2015 for incorrect or incomplete information reported on the return or statement, but the relief is not available if you fail to file. You have to show a good faith effort to comply so you cannot simply not file anything an expect relief.
With respect to the instructions themselves, to say that they are lengthy is an understatement. Employers should read them in detail to understand their obligations. However, some key provisions that help in compliance include:
- Clarification that employers must file Forms 1095-C and 1094-C with the IRS, and provide a copy of Form 1095-C to employees.
- A statement that, as noted above, forms 1095-C and 1094-C information returns are not required for 2014. Actual filings are not required until 2016 for the 2015 calendar year but employers may voluntarily file these forms in 2015 for 2014. If by chance an employer does choose to voluntarily files in 2015 for the 2014 year, penalties for the employer mandate payments will not be assessed for 2014.
- Establishment of specific dues dates for Forms 1095-C and 1094-C information returns. They must be filed by February 28 (for paper filings), or March 31 (for electronic filings) of the year following the calendar year to which the return relates.
- Clarification that a Form 1094-C must be attached to any Forms 1095-C filed by an employer. Each employer must file one 1094-C that reports aggregate employer-level data for all the employer’s full-time employees, which is referred to as the “authoritative transmittal” (and denoted accordingly on Line 19 of the Form 1094-C). Only one authoritative transmittal may be filed for each employer.
- Employers also must provide a Form 1095-C to each full-time employee by Jan. 31 of the year after the year to which the form relates (so that would be Jan. 31, 2016 for the 2015 reporting year). Incidentally, employee statements must be furnished to individuals in paper format by mail, unless the individual affirmatively consents to receiving the statement electronically.
As with the forms, the instructions are in draft format and subject to change and finalization. However, between the draft forms and the draft instructions, employers should now be able to ascertain generally what is required of them in reporting. Even though the mandatory reporting requirement does not completely kick in until after 2015, employers should spend some time reviewing these requirements with their plan professionals, preferably sooner rather than later, to get a sense of what data they will have to collect and how who has responsibility for making sure the information is accurate.
IRS releases draft instructions for ACA reporting forms
Forms 1094-B and 1095-B are used by organizations that are not reporting to the IRS as large employers – insurers and sponsors of multiemployer plans, for example. Forms 1094-C and 1095-C, meanwhile, are used by organizations that are subject to the employer mandate.
“The instructions are voluminous and reflect the complexity behind the information, particularly that employers are going to have to provide,” says Amy Bergner, managing director, human resource solutions at PricewaterhouseCoopers in Washington, DC.
The IRS released the draft forms a few weeks ago but without draft instructions, “it was difficult to tell exactly what employers and insurers were going to have to do,” she notes. “Now we have these draft instructions that really walk through what’s behind all of the reporting.
Bergner says employers should review the draft instructions as soon as possible with all third-party providers who help them with tax reporting. “Even though these reports are not filed with the IRS or sent to employees until early in 2016, employers have to be capturing the information on a monthly basis starting in January 2015,” she says.
The purpose of the forms is three-fold:
1. When individuals file their individual tax returns, they’re going to have to report whether or not they have health insurance as required by the ACA’s individual mandate. The IRS can compare what the individual is reporting with what the employer is reporting.
2. The IRS can double check whether people who have received federal government subsidies to buy insurance on the exchanges were actually entitled to it. People who are offered employer-sponsored coverage are not entitled to the subsidy.
3. The IRS can enforce the employer mandate, which requires employers with 50 or more full-time employees to offer health insurance.
“The instructions include many of the complicated and detailed rules about the employer mandate, details usually reserved for regulations or other technical guidance,” says Bergner. “We expect that many employers and insurers will need assistance decoding the instructions and the underlying rules to be able to ultimately provide timely and accurate reports.”
IRS releases draft of employer reporting form for health reform law compliance
Originally post July 25, 2014 by Matt Dunning on www.businessinsurance.com.
The Internal Revenue Service has issued draft versions of the reporting forms most employers will begin using next year to show that their group health insurance plans comply with the health care reform law.
The long-awaited draft forms, posted late Thursday afternoon to the IRS' website, are the first practical application of employers' health care coverage and enrollment reporting obligations under the Patient Protection and Affordable Care Act since the regulations were finalized in March.
The forms are the primary mechanism through which the government intends to enforce the health care reform law's minimum essential coverage and shared responsibility requirements for employers.
Beginning in 2015, employers with at least 100 full-time employees will be required to certify that benefits-eligible employees and their dependents have been offered minimum essential coverage and that their employees' contributions to their premiums comply with cost-sharing limits established under the reform law. Smaller employers with 50-99 full-time employees are required to begin reporting in 2016.
Additionally, self-insured employers will be required to submit documentation to ensure compliance with minimum essential coverage requirements under the reform law's individual coverage mandate.
“In accordance with the IRS' normal process, these draft forms are being provided to help stakeholders, including employers, tax professionals and software providers, prepare for these new reporting provisions and to invite comments from them,” the IRS said in a statement released Thursday.
The IRS said it expects to publish draft instructions for completing the reporting forms by late August and that both the forms and the instructions would be finalized later this year.
Last year, the Obama administration announced it would postpone implementation of employers' minimum essential coverage and shared responsibility obligations under the reform law for one year, largely due to widespread complaints about the complexity of the reporting requirements.
Though several months have passed since the administration issued a simplified set of information reporting rules, many employers have delayed preparations for meeting the requirements until the forms and instructions are available for review, said Richard Stover, a principal with Buck Consultants at Xerox in Secaucus, New Jersey.
“A lot of employers really haven't been doing anything about reporting requirements, even with the final regulations in place, because they were waiting for these forms,” Mr. Stover said. “This is something they've been anxious to see.”
Appeals court nixes subsidies for HHS exchange users
Originally posted July 22, 2014 by Allison Bell on https://www.lifehealthpro.com
A three-judge panel at the D.C. Circuit Court of Appeals has issued a decision that could block efforts to expand access to private health coverage in states that decline to set up state-based insurance exchanges.
The judges ruled 2-1 in Jacqueline Halbig et al. vs. Sylvia Mathews Burwell et al. (Case Number 14-5018) that the Internal Revenue Service (IRS) has no authority under the Patient Protection and Affordable Care Act (PPACA) to provide premium tax credit subsidies for users of the PPACA public exchanges run by the U.S. Department of Health and Human Services (HHS).
The subsidies have helped cut the amount QHP buyers pay out-of-pocket for premiums to an average of less than $50 per month.
PPACA created a premium tax credit subsidy for people who buy qualified health plan (QHP) coverage through the exchanges by adding Section 36B to the Internal Revenue Code (IRC).
PPACA lets HHS set up public exchanges in states that decline to set up their own exchanges. IRC Section 36B talks about providing credits to users of state-based exchanges and makes no mention of any credits to be provided for people who buy QHP coverage through the HHS-run exchanges, Circuit Judge Thomas Griffith writes in an opinion for the majority.
"The fact is that the legislative record provides little indication one way or the other of congressional intent, but the statutory text does," Griffith writes. "Section 36B plainly makes subsidies available only on exchanges established by states. And in the absence of any contrary indications, that text is conclusive evidence of Congress’s intent."
Griffith notes that Congress explicitly imposed some key PPACA commercial health insurance provisions, such as guaranteed issue and community rating requirements, on federal territories without providing full exchange subsidy funding for the territories.
PPACA implements some health insurance requirements, such as the community rating requirements, by making changes to the federal Public Health Services Act. HHS last week decided that, because the territories are not going to receive full PPACA expansion funding, the Public Health Services Act excludes territories from its definition of "state," and the PPACA insurance requirements seem to be destabilizing the territories' health insurance markets, the territories can be exempt from the PPACA rules that were set by changing the Public Health Services Act.
Treasury issues final rules regarding longevity annuities
Originally posted July 1, 2014 by Daniel Williams on www.lifehealthpro.com.
Good news on the retirement front.
Today, the U.S. Department of the Treasury and the Internal Revenue Service issued final rules regarding longevity annuities.
According to the ruling, "these regulations make longevity annuities accessible to the 401(k) and IRA markets, expanding the availability of retirement income options as an increasing number of Americans reach retirement age."
In commenting on the ruling, J. Mark Iwry, a Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy, said: “As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”
Cathy Weatherford, president and CEO of IRI weighed in on the ruling: “The availability of longevity annuities in workplace plans and IRAs will facilitate access to a steady stream of guaranteed income throughout a retiree’s later years and help Americans enhance their retirement security at a time when they are most vulnerable to outliving their financial assets or facing reduced standards of living."
Subsidies May Be Too High Or Low For Some Who Got Coverage
Originally posted May 19, 2014 on www.kaiserhealthnews.org.
More than a million Americans listed incomes on their health insurance applications that differ significantly from those on file with the Internal Revenue Service and therefore may be getting subsidies that are too high or low, The Washington Post says. Other media outlets report that states can decide whether to carry out a key part of the health law's small business exchanges for 2015 and that civil fines of up to $250,000 may be imposed on those who knowingly provide false information to get a subsidy.
The Washington Post: Federal Health-Care Subsidies May Be Too High Or Too Low For More Than 1 Million Americans
The government may be paying incorrect subsidies to more than 1 million Americans for their health plans in the new federal insurance marketplace and has been unable so far to fix the errors, according to internal documents and three people familiar with the situation. The problem means that potentially hundreds of thousands of people are receiving bigger subsidies than they deserve. They are part of a large group of Americans who listed incomes on their insurance applications that differ significantly — either too low or too high — from those on file with the Internal Revenue Service, documents show (Goldstein and Somashekhar, 5/16).
The Wall Street Journal: States To Decide On Key Part Of Small-Business Health Exchanges
The Obama administration said Friday it would let states decide whether to implement a key part of the health law's small-business exchanges next year, extending an earlier delay. The Department of Health and Human Services said in rules released Friday that it would be up to state insurance commissioners to decide whether employees at small businesses using the health-insurance exchanges could choose from a range of plans or be limited to just one selected by their employer (Radnofsky, 5/16).
The Associated Press: $250K Fine For Lying On Health Insurance Forms
Lying to the federal health insurance man could cost you dearly. The Obama administration Friday spelled out civil fines of up to $250,000 for knowingly and willfully providing false information to get taxpayer-subsidized coverage under the new health care law (5/16).
The Hill: HHS Opens Door To Extra Funds For Insurers
Health insurance companies can count on funds from the government if ObamaCare's risk corridor program does not sufficiently cover losses that are higher than expected this year. This news was published in regulations Friday outlining how the law's health insurance exchanges will operate in 2015 (Viebeck, 5/16).
The Fiscal Times: Senators on Botched Obamacare Websites: You Break It, You Bought It
Republican senators are demanding answers from the Obama administration on the handful of failed state exchange websites that have cost taxpayers literally billions of dollars. Some even say that the states should reimburse the government for the cost of these exchange failures. So far, at least four largely inoperable state websites – in Massachusetts, Maryland, Nevada and Oregon – have cost the federal government $4 billion. That number is expected to rise as the states spend more money to replace or rebuild the bad sites (Ehley, 5/16).
Same-Sex Couples (still) Not “Married” for Federal Tax Purposes
by Robert A. Browning,
The Internal Revenue Service (IRS) has recently issued guidance, through answers to frequently asked questions (FAQs), clarifying how same-sex couples who are in state recognized domestic partnerships, civil unions, or marriages should file their federal income tax returns. These FAQs address a key provision of the Defense of Marriage Act (DOMA), which denies recognition of same-sex marriages or unions for purposes of administering federal law.
Even though the Obama administration has decided not to defend this key DOMA provision, and even though a number of federal courts (including two appellate courts) have held the provision to be unconstitutional, the IRS continues to maintain that same-sex couples do not qualify for the same tax benefits that are available to taxpayers who are married to someone of the opposite sex. This is true even if a same-sex couple is legally married under state law. This IRS position could have implications in a number of benefit-plan contexts.
Background
Section 3 of DOMA defines “marriage,” for purposes of administering federal laws, as a “legal union between one man and one woman as husband and wife.” It also defines “spouse” as “a person of the opposite sex who is a husband or wife.” Consequently, DOMA prohibits the federal government from recognizing same-sex marriages (or domestic partnerships or civil unions). This prohibition affects federal income taxes, Social Security benefits, and more than 1,000 other federal laws – including ERISA and the tax laws governing employee benefits.
A number of federal trial courts (now joined by two federal appellate courts) have ruled in favor of plaintiffs challenging this provision of DOMA in various tax-related contexts. In Massachusetts v. Health and Human Services, the First U.S. Court of Appeals upheld a lower court’s ruling that Section 3 of DOMA violates the U.S. Constitution. More recently, in Windsor v. U.S., the Second U.S. Court of Appeals upheld a trial court’s ruling that DOMA violates the Equal Protection Clause of the U.S. Constitution. In Windsor, the appellate court concluded that laws affecting homosexuals as a class are subject to heightened scrutiny, and when viewed in light of such scrutiny, the disparate treatment of same-sex spouses is not “substantially related” to an important government interest.
On February 23, 2011, Attorney General Eric Holder published a statement indicating that both he and President Obama had concluded that Section 3 of DOMA is unconstitutional. The Attorney General’s statement provided that the Department of Justice would no longer defend the constitutionality of DOMA’s Section 3 as applied to same-sex married couples in cases filed within the Second Circuit. However, the statement also noted that DOMA remains in effect until Congress repeals it or there is a final (i.e., Supreme Court) judicial decision striking it down. The statement concluded by noting that, although the Justice Department would not defend DOMA in court, the Executive Branch would continue to enforce the law.
The Obama administration has formally asked the Supreme Court to step in (as the 3 final arbiter of the constitutionality of the law), and many legal experts expect the Supreme Court to rule on DOMA’s constitutionality in the near future – possibly as early as the spring of 2013.
IRS Guidance
In its recent FAQs, the IRS continues to defer to DOMA on questions concerning same-sex couples’ federal income tax returns. In summary, the guidance provides that:
- Same-sex couples who are legally married for state-law purposes may not file a return using either the “married filing jointly” or “married filing separately” status;
- An individual may not file as a “head of household” based solely on his or her same-sex partner, regardless of whether the same-sex partner is the taxpayer’s dependent;
- If a child is a “qualifying child” (under Code Section 152(c)) of both parents who are same-sex partners, then either parent – but not both – may claim a dependency deduction for the child;
- If a same-sex couple adopts a child together, each partner may claim the adoption credit in an amount equal to the qualified adoption expenses paid or incurred by that partner, but the partners may not both claim a credit for the same expenses; and
- If an individual adopts the child of his or her same-sex partner, the individual may claim an adoption credit for the qualifying adoption expenses.
These FAQs confirm that, notwithstanding the President’s decision not to defend DOMA in court, and notwithstanding the fact that DOMA has now been held unconstitutional by two appellate courts, the IRS will continue to apply and enforce federal tax laws in accordance with DOMA’s Section 3.
Therefore, until there is action by either Congress or the Supreme Court, employers must (by way of example) continue to report the value of health insurance provided to an employee’s non-dependent, same-sex spouse or partner as additional taxable income to the employee, and they must continue to limit “spousal” rights under ERISA-covered plans to participants who are married to someone of the opposite sex.