The recent repeal of the Defense of Marriage Act (DOMA) results in significant changes to employer-sponsored benefit plans. The purpose of this update is to inform employers of their obligations relating to their employee benefits plans and also to identify next steps to ensure compliance with this change in the law.
GENERAL OVERVIEW OF THE LAW
What is DOMA? The Defense of Marriage Act (DOMA) was enacted in 1996 for the purpose of denying benefits to same-sex couples even if they are married by a state. DOMA defined “marriage” as a legal union between one man and one woman and further defined “spouse” as a person of the opposite sex. DOMA also provided that these definitions would apply to any act of Congress, or to any ruling, regulation, or interpretation by the various administrative bureaus and agencies in the United States. It was clear from the statute that for all purposes under federal law, only opposite-sex marriages would be recognized – at least until the Windsor decision.
What is current federal law? On June 26, 2013, the United States Supreme Court declared that DOMA was unconstitutional and that legally married same-sex couples were entitled to federal benefits. In United States v. Windsor, the Court held that Section 3 of DOMA was unconstitutional, as it violated equal protection rights. In states that recognize same-sex marriage, a legally married same-sex spouse will now be treated as a spouse for purposes of the Internal Revenue Code (“the Code”) and the Employee Retirement Income Security Act of 1974, as amended (ERISA).
Most employee benefit plans are governed by the Code and ERISA. If state law attempts to govern an ERISA-covered plan, the general rule is that the state law will be preempted by ERISA. The one exception to this general rule is that ERISA will not preempt state laws that govern insurance.
How does the repeal of DOMA affect state law? The repeal of DOMA did not change the fact that each state has the right to decide independently whether it wants to grant legal status to a same-sex marriage. Currently 12 states, along with the District of Columbia, recognize same-sex marriage. Several other states authorize same-sex unions or domestic partnerships and provide some or all of the rights and benefits of marriage to couples in these arrangements. The Windsor decision does not extend to domestic partnerships or civil unions. The majority of the states, however, continue to recognize marriage only between a woman and a man. Some of the states explicitly recognize same-sex marriages legally performed in another state; absent such explicit recognition, the legal status of such marriages in non-recognition states continues to evolve.
Does the federal law apply to a same-sex couple living in a state that does not recognize same-sex marriage? The short answer is yes. Under recent IRS Revenue Ruling 2013-17, a same-sex couple that is legally married in a jurisdiction that recognizes their marriage will be treated as married for federal tax purposes. This means that whether the couple resides in a jurisdiction that recognizes same-sex marriage or resides in a jurisdiction that does not recognize same-sex marriage, their federal tax filing status will not change, provided that the same-sex couple was legally married in a jurisdiction that recognized their marriage.
The Revenue 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.
What is the effective date? The Court ruling was effective June 26, 2013. This means that for federal tax purposes, same-sex couples that are legally married in a jurisdiction that recognizes their marriage will be able to file joint federal tax returns for the 2013 tax year. Given that the ruling held part of the federal law unconstitutional, it is not entirely clear whether this date or a retroactive date will apply overall. The IRS has further indicated that it intends to issue guidance on the retroactive application of the Court’s decision. The IRS has indicated that, for qualified retirement plans, operational compliance was effective September 16, 2013. The IRS recognizes the compliance burden on plan sponsors and will be issuing further guidance on the timing of plan amendments as well as correcting errors that arise during this transitional period. We are anticipating further guidance on this issue.
QUALIFIED RETIREMENT PLANS
How are qualified retirement plans affected by same-sex marriage? A qualified retirement plan is a plan that is sponsored by an employer for the benefit of its employees and that provides or defers income until retirement. The term “qualified” means that the retirement plan will be afforded special tax treatment because it meets the requirements under the Code. Examples of qualified retirement plans include profit-sharing plans, 401(k) plans, 403(b) plans, money purchase pension plans, and defined benefit plans. Since qualified retirement plans are governed by ERISA and the Code, the plans are subject to federal law and therefore a spouse of a legally married same-sex couple will now be recognized whether the couple resides in a jurisdiction that recognizes same-sex marriage or resides in a jurisdiction that does not recognize same-sex marriage.
Will a same-sex spouse be permitted to elect a direct rollover from a qualified retirement plan? Typically, a spouse is permitted to roll over the employee’s distribution to another plan or IRA in the event of the participant’s death. Now that a spouse of a legally married same-sex couple is recognized as a spouse under federal law, the distribution of an employee’s benefit to a same-sex spouse will be permitted to be rolled over to another plan or individual retirement account to defer income tax. Because this is a federal tax rule, an employer cannot provide for different treatment under its plan.
Can a participant be permitted to take a hardship distribution for expenses incurred by a same-sex spouse? Since a spouse of a legally married same-sex couple is recognized as a spouse under federal law, a hardship distribution will now be permitted for the medical, educational, or funeral expenses of a same-sex spouse, regardless of whether the same-sex spouse qualifies as a dependent under the Code.
Is a same-sex spouse eligible for a QJSA? The required form of distribution under a defined benefit plan and/or a money purchase pension plan is a qualified joint and survivor annuity (QJSA), which is defined as an immediate annuity for the life of the participant, with a survivor annuity for the life of the participant’s spouse. This automatic form of distribution may be waived with written spousal consent. Since a spouse of a legally married same-sex couple is now recognized as a spouse under federal law, a participant married to a same-sex spouse shall be treated as a married participant for purposes of the QJSA requirements. Further, the spousal consent requirement to waive the QJSA, which is imposed by federal tax law, will also apply to a same-sex spouse.
Is a same-sex spouse eligible for a QPSA? A qualified pre-retirement survivor annuity (QPSA) provides for an immediate annuity for the life of the surviving spouse of a participant who dies before the participant’s annuity starting date. With the repeal of DOMA, the spouse of a legally married same-sex couple is recognized under federal law, which means that the distribution of death benefits to a same-sex spouse is also now required.
In the event of dissolution of a same-sex marriage, may a same-sex spouse obtain a QDRO? A qualified domestic relations order (QDRO) permits the assignment of all or a portion of the employee’s retirement benefit pursuant to a court order to a spouse or former spouse of the employee. Now that a spouse of a legally married same-sex couple is recognized under federal law, the assignment of the participant’s retirement benefit to a same-sex spouse pursuant to a court order will be recognized as a QDRO.
Is there any impact on loans or other distributions from a retirement plan? Possibly. Where plan terms require spousal consent for a plan loan or other distribution to a participant, a legally married same-sex spouse‘s consent will now be required.
NON-QUALIFIED DEFERRED COMPENSATION PLANS
Are non-qualified retirement plans affected by this change in federal law? A non-qualified retirement plan is typically provided to a select group of management to defer additional income for retirement. An employer’s ERISA-covered plan is required to recognize a spouse of a legally married same-sex couple. An employer that sponsors a non-qualified deferred compensation plan will need to examine the language in the plan document to determine how “spouse” is defined and whether such definition extends to a same-sex spouse.
HEALTH AND WELFARE PLANS
If an employer sponsors a fully insured medical/dental plan, must a same-sex spouse be included? An employer that sponsors a medical plan, dental plan, or health maintenance organization contract that provides a benefit to employees and their beneficiaries will likely be subject to state insurance laws. State insurance laws are not preempted by ERISA, which means that for purposes of group health, dental, or insurance contracts, the term “spouse” shall be interpreted by operation of law to include a same-sex spouse only in those states that recognize a same-sex marriage. This does not preclude an employer in a state that does not recognize same-sex marriage from otherwise extending benefits to a spouse of a same-sex couple under the terms of the plan or contract.
If a same-sex spouse is included in a medical/dental plan, will the cost of coverage be excluded for federal income tax purposes? Yes, federal tax law excludes from the employee’s gross income the cost of coverage for a spouse or a dependent. Previously, a plan that covered a same-sex spouse was required to impute taxable income equal to the value of that coverage. Since a same-sex marriage/spouse is now recognized under federal law, the value of the cost of coverage provided to a legally married same-sex spouse will be excluded from the employee’s gross income for federal income tax purposes, and the same-sex spouse will be covered on a tax-free basis the same as an opposite-sex spouse. This tax treatment also applies for state income tax purposes where a state recognizes a spouse of a legally married same-sex couple.
However, where a state does not recognize a spouse of a legally married same-sex couple, and where benefits are extended to a same-sex spouse, imputed taxable income equal to the value of the coverage will continue to apply for state income tax purposes.
Is a same-sex spouse required to be included in a self-insured medical/dental plan? If the employer sponsors a self-insured plan (i.e., the employer pays the cost of the claims, and such plan is typically governed by federal law), then the employer would not be regulated by state insurance law and could either require or prohibit extending coverage to a spouse of a legally married same-sex couple. Employers that sponsor self-insured plans will need to examine their plan documents to determine how “spouse” is defined. If it is determined that the definition of “spouse” is not clear with respect to including or excluding a same-sex spouse, then the employer will need to revise the plan documents accordingly.
COBRA CONTINUATION COVERAGE
If an employer is subject to federal COBRA, will the employer be required to offer COBRA continuation coverage to a same-sex spouse? The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is a federal law that requires employers to offer continuation of health benefits to certain individuals who would otherwise lose coverage. Federal COBRA applies to an employer that maintains a group health plan for its employees or their families, provided that the employer has at least 20 employees.
COBRA continuation coverage is required to be offered to a “qualified beneficiary,” defined as any employee, spouse of an employee, or dependent child of an employee that is covered under the group health plan on the day before the event that causes the individual to lose his or her coverage. In accordance with federal law, the term “spouse” would include a spouse of a legally married same-sex couple. Thus, a same-sex spouse is entitled to full COBRA rights (up to 36 months of continuation coverage) in the event of the participant’s termination of employment, divorce, or legal separation. Employers should review their COBRA notices/election forms and procedures to ensure consistency with the federal law.
What if the employer is subject to state mini-COBRA? Many states have passed legislation that is often referred to as a “mini-COBRA” statute and contains provisions that are similar to the federal statute but apply to employers having fewer than 20 employees. Accordingly, an employer that sponsors a fully insured group health plan and is subject to the state “mini-COBRA” statute will be required to follow state law. In a state that recognizes same-sex marriage, for example, the employer will be required to offer mini-COBRA continuation coverage to a same-sex spouse. If the employer sponsors a self-insured plan that is not subject to state insurance law, then the employer may, but is not required to, offer mini-COBRA continuation coverage to a spouse of a legally married same-sex couple.
HIPAA – SPECIAL ENROLLMENT RIGHTS
Will a same-sex spouse be subject to special enrollment rights under HIPAA? The Health Insurance Portability and Accountability Act of 1996 (HIPAA) provides certain protections to employees and their families who might incur discrimination in their health coverage. The special enrollment rights under HIPAA require that a group health plan offer special enrollment to a newly acquired spouse and/or dependent of the participant, and also to the employee who has previously declined coverage but has since acquired a new spouse or dependent. Since HIPAA is a federal law that is subject to the repeal of DOMA, the employee’s coverage will be required to add a spouse of a legally married same-sex couple.
CAFETERIA PLANS
Is an employer required to extend cafeteria plan benefits to a same-sex spouse? A cafeteria plan is an employer-sponsored plan that offers employees a choice between cash or pre-tax benefits. For instance, an employer will often sponsor a cafeteria plan to enable an employee to pay for his or her portion of group health plan coverage on a pre-tax basis. Previously, an employee was not permitted to pay for health coverage of a same-sex spouse with pre-tax dollars or even reimburse medical expenses from such accounts. Under current federal law, an employee may now pay for health/dental coverage for a spouse of a legally married same-sex couple on a pre-tax basis and without imputing income to the employee. Cafeteria plans are governed by federal law and will now be required to extend coverage to a spouse of a legally married same-sex couple.
LIFE INSURANCE/DISABILITY PLANS
Are employer-sponsored life insurance and/or disability plans required to include a same-sex spouse? Almost all life insurance and/or disability plans are governed by state insurance law and will be subject to the laws of the state of issuance. If insurance is provided by a carrier that is subject to state insurance law, and the state of issuance recognizes same-sex marriage, then the definition of spouse in these policies will be interpreted to include a same-sex spouse.
DOMESTIC PARTNER BENEFITS
What if the employer provides employee benefits to domestic partners? A domestic partner is not recognized under federal law and will not be subject to the same treatment as a spouse of a legally married same-sex couple described above.
Now that many states and federal law recognize same-sex marriage, employers that offer domestic partner benefits will need to consider whether to continue offering such benefits in their plans. In the past, an employer typically offered domestic partner benefits only to same-sex couples in order to provide a benefit that would not have otherwise been available (the rationale being that a same-sex domestic partner did not have the option of marriage). Employers that wish to continue domestic partner benefits in their plans may need to extend such benefits to both opposite-sex and same-sex couples to avoid any potential state or federal law discrimination issues.
ACTION STEPS
What steps should an employer take with regard to the repeal of DOMA? While we await further guidance from the Internal Revenue Service on this very significant change, there are action steps an employer can take now in order to comply with federal law. First, employers should establish a process to identify married participants (i.e., same-sex spouses and opposite-sex spouses alike). Second, all plan documentation (formal plan documents, summary plan descriptions, election/distribution forms, notices, communications, policies/procedures, etc.) need to be carefully reviewed for the definition of “spouse” to determine whether any changes are necessary. We are available to assist you with these first steps at your request and will keep you apprised of future guidance.
If you have any questions or would like to discuss this further, please contact any member of our Employee Benefits Practice Group.