DOMA ruling complicates benefits administration
Originally posted by Andrea Davis on https://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.
Now What? Employer Benefits Obligations Post-DOMA
Originally posted by Stephen Miller on https://www.shrm.org
On June 26, 2013, the U.S. Supreme Court, in United States v. Windsor, found unconstitutional Section 3 of the federal Defense of Marriage Act (DOMA), which had prohibited the federal government from acknowledging marriages between same-sex couples. Same-sex marriages were recognized as legal by 12 states and the District of Columbia at the time of the ruling. In a related case, Hollingsworth v. Perry, the court ruled that those challenging a California state court decision that made same-sex marriage legal in California (by overturning a state ballot initiative known as Proposition 9) lacked standing to do so—a finding that will restore legal same-sex marriage in the state.
“The Windsor decision is as many expected," Roberta Chevlowe, senior counsel in law firm Proskauer's employee benefits practice center in New York, told SHRM Online. "While the court held that Section 3 of DOMA (which defines 'marriage' and 'spouse' as excluding same-sex partners) is unconstitutional on equal-protection grounds, the decision does not force same-sex marriage on the states, which appear to continue to be free to define marriage as they wish and not recognize same-sex marriage."
For employers, "the Windsor decision means that there is much work to do with regard to the employer's benefit plans, even for employers who do not operate in states that recognize same-sex marriage," Chevlowe added. "On the health benefits side, among other things, employers will need to revisit the definition of 'spouse' in their plans to ensure that the definition is consistent with the employer's intent, in light of the decision. Employers may also need to cease imputing income to employees for the value of the health benefits they provide to same-sex spouses. With regard to qualified pensions, plan language and procedures will need to be considered because same-sex spouses have additional rights to federally protected benefits."
In addition, "Employers should expect that employees will immediately start asking questions about their rights with regard to various employee benefits, and 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,” Chevlowe said.
Expanded Obligations
In an e-mail, Todd Solomon, an employee benefits partner at law firm McDermott Will & Emery LLP in Chicago, identified the following as key benefits implications for private-sector organizations (but not necessarily state government and church employers) now that Section 3 of DOMA has been struck down.
For a legally married couple who live in a state where same-sex marriage is recognized:
- Federal laws governing employee benefit plans will require companies to treat employees’ same-sex and opposite-sex spouses equally for purposes of the benefits extended to spouses.
- Employers with self-insured welfare plans (meaning benefits are paid out of the company’s general assets) may not have to extend spousal-benefit coverage to same-sex spouses, because federal law does not require spousal welfare-benefit coverage and because state insurance law mandates do not apply to self-insured plans. However, employers that continue to provide benefit coverage only to opposite-sex spouses "are almost certain to face legal challenges under federal discrimination law," Solomon advised.
- Employees will no longer have to pay federal income taxes on the income imputed for an employer’s contribution to a same-sex spouse’s medical, dental or vision coverage. And workers can pay for same-sex spouses’ coverage on a pretax basis under a Section 125 plan.
- Businesses will have to offer COBRA continuation coverage to same-sex spouses.
- Employers with pension plans will be required to recognize same-sex spouses for purposes of determining surviving-spouse annuities. Same-sex spouses must also agree to receive payment of their deceased spouse’s pension benefits in a form other than a 50 percent joint and survivor annuity, with the same-sex spouse as the beneficiary.
- Organizations with 401(k) plans will have to recognize same-sex spouses for purposes of determining death benefits, and same-sex spouses must consent to beneficiary designations.
- Employees must be permitted to take family and medical leave to care for an ill same-sex spouse.
"The above rules only apply to same-sex spouses who were married in and live in a state where same-sex marriage is legal,” Solomon clarified. “The big open question is what happens to same-sex spouses who live in states such as Florida or Texas," which don't recognize same-sex marriages. "No one can answer the question until additional guidance is issued. It is possible that the answer can vary for different purposes—for example, state of residence will likely carry the day for tax filing and imputed income purposes, but it is possible the IRS could say that 'state of celebration' governs for pension plan purposes. In the meantime, it appears that employers can choose either approach, but it will be imperative to amend plans to add clear plan language to document the employer's approach."
The decision "will affect retirement plan administration because plans will have to obtain the consent of the same-sex spouse to permit a waiver of the qualified joint and survivor annuity (QJSA) form of benefit or for any other purposes for which the consent of an opposite-sex spouse is required," in states that recognize same-sex marriages, concurred Leslye Laderman and Marjorie Martin, principals at Buck Consultants LLC. "It is unclear from theWindsor ruling whether employers will be required, or permitted in the case of the QJSA, to recognize same-sex spouses of employees living in states that do not recognize same-sex marriages as spouses for purposes of these laws. Additional guidance is needed."
Retroactive Benefits
Another question is whether employees can claim benefits retroactively—for instance, seeking past tax relief for spousal health care benefits—if they've been married to their same-sex spouse in a state that recognizes same-sex marriage. Solomon observed: "It is certainly not clear yet, but I would think employees should be able to amend tax returns for open years to claim refunds. And employers should be able to get refunds of FICA taxes for prior open years."
Retroactivity “is one of the most important practical questions facing employers and plan sponsors" following the DOMA ruling, added Joanne Youn, an ERISA and benefits law attorney at Caplin & Drysdale in Washington, D.C. "While the court did not specifically address retroactivity broadly, the decision arose out of a claim for refund of estate taxes paid by a same sex-spouse in a prior tax year. The IRS has authority under existing law to grant relief from retroactivity; however, even if it were to do so, its authority would not extend to other statutes affecting employee benefits, such as ERISA. The decision itself references the fact that over 1,000 federal laws contain provisions specifically applicable to spouses that may be affected and should be coordinated. Therefore, I would expect that additional guidance will be issued in the coming months.”
Deferring to State Law
Rita F. Lin, a partner at Morrison Foerster in San Francisco, said that many federal laws governing spousal benefits do not contain a statutory definition indicating which law governs whether an individual is “married.”
"Typically, federal laws defer to state law on this issue,” Lin explained, “but it will often be an open question under choice-of-law principles whether the applicable state law is the law of the state in which the couple was married or the state in which the couple currently resides. Some federal statutes (e.g., Social Security) look to whether a couple is married at the time that benefits are sought, which may suggest that the law of the state of current residence will apply. Others (in the immigration context) look to the state where the couple was married."
Lin revealed that there are "rumors that the administration may be considering an executive order that directs federal agencies, in interpreting federal statutes, to treat the state where the marriage celebration occurred as the governing state for purposes of determining whether couples are married.” She added: “I would note that, though there may be some short-term confusion, this is not technically a new issue. The states vary in their definitions of marriage on issues like common-law marriage, first-cousin marriage and age of eligibility, so this could always be an issue when married couples move to a new state that does not recognize their marriage. Of course, the issue is now going to be presented on a much larger scale than before, so we may see an attempt to resolve this in a more uniform fashion."
Presidential Action
Similarly, Hunter T. Carter, a litigation partner at Arent Fox in New York and Washington, D.C., said: "The president is crucial to implement the Supreme Court decision overturning DOMA, and employers will be watching to see what the president does. Everywhere he can do so, President Obama is expected to approve regulations and interpretations that apply the term 'spouse' to same-sex couples who were legally married, regardless where the couple was from or has moved."
Changing regulations that define "spouse" may take longer than an executive order, Carter said, "but again, President Obama will be crucial. Currently, the IRS and Social Security determine marriage status by where the couple lives, not where they married, so anyone in the 38 states that don't yet recognize or allow same-sex marriage will be unmarried for IRS and Social Security purposes until regulations can be changed. This is true even though they are otherwise identical to their neighbors who may have married in another state, like New York, which also allows same-sex marriage. Other agencies will not need to change, like the Defense Department, which interprets marital status based on where the couple was married."