On June 26, 2013, in U.S. v. Windsor, the Supreme Court struck down as unconstitutional Section 3 of the Defense of Marriage Act (“DOMA”), which provided that only opposite-sex marriages would be recognized as valid for federal law purposes. As a result, individuals who are spouses in a same-sex marriage that is recognized under applicable state law are considered to be married when applying federal statutes and regulations that refer to or involve marital status.
The Windsor ruling affects over 1,000 federal laws and regulations, including a number that bear on the design and administration of employee benefit plans. This Employee Benefits Update provides a general overview regarding the impact of the Windsor case on employee benefits.
Notably, it appears that the Windsor decision does not affect an employee benefit plan’s treatment of individuals who are not married under applicable state law, including many who qualify as domestic partners under state law or an employer’s policies or procedures. Further, Windsor does not require all states to recognize same-sex marriage. Rather, in the context of employee benefits, Windsor effectively requires that spouses under a same-sex marriage recognized by applicable state law be treated the same as opposite-sex spouses for federal law purposes.
Even with regard to same-sex marriage, there are a number of open questions that were not addressed by the Windsor decision. For example, it is uncertain whether a same-sex couple that is recognized as married while residing in one state will continue to be considered married for federal law purposes if they move to a state that does not recognize same-sex marriage. In other words, while (as stated above) Windsor holds that individuals must be treated as married for federal law purposes if they are in a same-sex marriage under applicable state law, there are a number of circumstances in which it is unclear which state law will be considered to be “applicable” for this purpose.
It is also unclear at this time whether (and to what extent) the ruling will have retroactive effect. It is anticipated that the IRS and other relevant federal agencies will be providing guidance to address these and other issues regarding the implementation of the Windsor ruling.
Possible Implementation Steps
While awaiting guidance from the relevant federal agencies, employers should consider beginning the process of ascertaining and addressing the impact the Windsor decision will have on their employee benefit arrangements. Although final resolution of some issues may require agency guidance, it may be useful to begin taking the following steps:
- Review. Look through all benefit plans and policies, as well as related administrative practices, to identify situations where marital status is relevant. In this regard, the sections below in this Employee Benefits Update identify a number of employee benefit requirements that are affected by Windsor. However, relevant plan documents may include other references to spouses or marriage that would have to be evaluated in light of Windsor.
- Analysis. Determine how the Windsor decision will affect the treatment of marital status under the employer’s benefit programs. In analyzing these issues, employers should take into account the extent to which their plans have previously provided benefits to same-sex spouses, individuals in civil unions under state law or persons who qualify as domestic partners under the employer’s policies. Employers will need to consider how plan changes will impact all of these groups.
- Coordination. Reach out to insurers, payroll services, third-party administrators and other service providers to discuss the changes in policies and procedures that may be necessary or appropriate in light of Windsor.
- Communication. Notify employees of the impact Windsor will have on benefit arrangements if they have a same-sex spouse and suggest that they may wish to consider reviewing their benefit-related decisions (e.g., medical plan elections or beneficiary designations) in light of the changes to the employer’s plans and policies that result from the decision. It may be appropriate to identify and reach out to employees that the employer knows may be affected by the Windsor ruling and (depending on the circumstances) note the impact on their existing beneficiary designations, tax withholding forms (i.e., Form W-4), etc.
- Revision. Make appropriate amendments to benefit plan documents and revisions to forms and policies to reflect the impact of Windsor (although in many cases it may be appropriate to delay plan amendments until after the IRS and other relevant federal agencies provide guidance).
Background Concerning the Impact of Windsor
The following sections of this Employee Benefits Update identify a number of situations involving same-sex marriage where the Windsor decision changes the application of federal law to employee benefit arrangements. In some cases, these changes will entitle same-sex spouses to new rights under benefit plans. In other situations, Windsor changes the federal tax treatment applicable to participants and their same-sex spouses. Note that Windsor generally does not affect state income tax treatment in these circumstances. Note also that there may be circumstances not identified in the following sections where Windsor may have an effect on employee benefits, e.g., where a plan document affords special benefits to spouses that are not legally required.
Windsor’s Impact on Retirement Plans
- Spousal Benefit Rights. Same-sex spouses now have the following spousal benefit rights under retirement plans:
- Surviving spouses of participants in most 401(k) plans, ERISA-covered 403(b) plans and certain other defined contributions plans must be treated as the primary beneficiary of 100% of the participant’s plan accounts unless the spouse consents to the designation of another beneficiary in writing.
- Surviving spouses of participants in tax-qualified defined benefit pension plans or money purchase pension plans (and certain other defined contribution plans) are entitled to receive pre-retirement survivor benefits under the plans if the employee dies prior to commencement of benefits.
- Spouses of participants in qualified defined benefit pension plans, money purchase pension plans (and certain other defined contribution plans) are entitled to share in the participant’s retirement benefits through a joint and survivor annuity unless the spouse elects to waive that protection.
- Consent for Loans. Under certain types of plans (such as a money purchase pension plan), participants now may not borrow against their plan benefits without the written consent of their same-sex spouses.
- Hardship Withdrawals. Hardship withdrawals by participants from 401(k) and 403(b) plans (and withdrawals for unforeseen emergencies under 457(b) plans and other non-qualified deferred compensation plans) may now take into account certain expenses (such as medical, tuition and funeral expenses) of same-sex spouses.
- QDROs. A participant’s benefits under tax-qualified plans and other plans covered by ERISA may now be transferred to a same-sex spouse under a qualified domestic relations order if the participant and spouse divorce.
- Rollovers. A same-sex spouse who receives plan distributions upon the participant’s death may now roll over that distribution to his or her own IRA or a qualified retirement plan.
- Required Minimum Distribution (“RMD”) Rules. The favorable RMD rules applicable to married participants under tax-qualified plans, 403(b) plans, 457(b) plans, and IRAs are now applicable to participants with same-sex spouses (e.g., the annual RMD is reduced if the participant is married to a spouse who is more than 10 years younger, and the spouse may wait until the participant would have turned age 70½ before commencing the receipt of his or her death benefit).
Windsor’s Impact on Health Plans and Other Fringe Benefits
- Tax Treatment of Health Plan Coverage.
- Employers may now provide health plan coverage to their employees’ same-sex spouses without imputing taxable income to their employees on the value of the spouse’s coverage.
- Pre-tax treatment is now permitted for employee contributions for health plan coverage, as well as medical reimbursements for eligible expenses of same-sex spouse under flexible benefit (i.e., “cafeteria”) plans.
- No FICA or FUTA tax will be payable on employer-provided health coverage for, or employee pre-tax payments relating to, an employee’s same-sex spouse. (Some employers are considering filing for refunds of FICA and FUTA taxes paid with regard to same-sex spousal coverage in the past.)
- COBRA. Health care continuation rights under COBRA must now be provided for same-sex spouses covered by employers’ health plans to the same extent as is required for opposite-sex spouses.
- HIPAA. HIPAA enrollment rights permitting immediate enrollment in a health plan when certain events occur will now apply to same-sex spouses to the same extent as is required for covered opposite-sex spouses.
- Dependent Care Plans. Same-sex spouses may now receive the same favorable federal income tax treatment regarding dependent care flexible benefits plans as is available to opposite-sex spouses.
- Life Insurance. Group term life insurance coverage of up to $2,000 generally may now be provided to same-sex spouses of employees to the same extent that tax treatment is available to opposite-sex spouses.
- Miscellaneous. Same-sex spouses of employees may now be provided with various benefits that receive favorable treatment for federal income tax purposes (subject to applicable IRS requirements) – e.g., retirement planning services, employee discounts, no additional cost services, use of certain employer-provided athletic facilities and tuition reduction for educational organization employees.
- Family and Medical Leave Act Policy. The Family and Medical Leave Act (“FMLA”) provides various leave of absence rights to eligible employees. Those rights include rights to take leaves of absence based on spousal relationships in certain circumstances, including the right to take an FMLA-protected leave to care for a spouse with a serious health condition. Employees with same-sex spouses will now have the same FMLA rights and will be subject to the same limitations on FMLA rights applicable to other spousal relationships.
The extent of the impact of the Windsor decision on an employer’s benefit plans and arrangements will depend on numerous factors – e.g., the types of benefit programs the employer maintains, the past treatment of same-sex marriage under those programs, and the timing and substance of federal agency guidance on the implementation of Windsor’s ruling. In general, employers will benefit from taking a proactive approach in identifying and addressing the benefit plan changes that arise from the ruling in Windsor.