Yesterday, the U.S. Supreme Court, in U.S. v. Windsor, ruled that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional because it violates the Fifth Amendment’s equal protection guaranty for persons of the same sex who are legally married under the laws of their state of residence.
Prior to the Windsor ruling, Section 3 of DOMA provided that only persons of the opposite sex are recognized as “spouses” or “married” for purposes of federal law. Section 3 of DOMA applied to over 1,000 federal laws, rules and regulations, including the Internal Revenue Code and ERISA. As a result of the Windsor ruling, same-sex couples who are legally married in the state of their residence1 are required to be recognized as “spouses” or “married” for purposes of federal law. The Windsor ruling has immediate implications for employers maintaining retirement plans, health and welfare plans, and other fringe benefit programs. In addition, the ruling may also impact employers’ payroll practices.
Below is a high-level overview of the effect the Windsor ruling is expected to have on various types of employee benefit plans and arrangements:
Qualified Retirement Plans
- Survivor Benefits – Qualified defined benefit plans (and certain defined contribution plans) are required to provide that a participant’s benefit will be paid in the form of an annuity for the life of the participant with a 50 percent (or more) survivor benefit paid to the participant’s spouse unless the spouse consents to another form or payment. These plans must also provide that if a participant dies prior to retirement, the spouse would receive an annuity for the life of the spouse equal to 50 percent of the participant’s benefit at the time of death. As a result of the Windsor ruling, a legally married same-sex spouse of a plan participant will be provided with these same rights.2
Defined contribution plans that do not provide joint and survivor annuity payment forms must nonetheless provide that, unless the spouse consents otherwise, the entire plan account balance of the participant will be payable to the spouse upon the death of the participant. As a result of the Windsor ruling, a legally married same-sex spouse of a deceased participant will have the right to receive the deceased participant’s plan account balance (and to consent otherwise).
- QDROs – A qualified domestic relations order (QDRO) allows a divorced spouse to receive a portion of a participant’s benefit in a qualified retirement plan. Previously, this process was not available for married same-sex couples. As a result of the Windsor ruling, divorcing same-sex couples can utilize the QDRO process to assign a portion of the participant’s benefit in a qualified retirement plan to the former spouse.
- Rollovers – The Internal Revenue Code provides that the spouse beneficiary of a retirement plan participant is permitted to receive distribution of the deceased participant’s plan benefit in the form of a rollover to either a IRA or a qualified retirement plan. Previously, same-sex spouses were treated as non-spouse beneficiaries for this purpose and were limited to rolling over the benefit to an inherited IRA. As a result of the Windsor ruling, a legally married same-sex spouse of a deceased participant will be permitted to roll over the participant’s benefit to the spouse’s own IRA or to a qualified retirement plan sponsored by the spouse’s employer.
- Minimum Required Distributions – As a result of the Windsor ruling, a legally married same-sex spouse of a deceased participant will be permitted to delay distribution of the participant’s benefit from the plan until the time when the participant would have attained age 70½. Previously, a same-sex spouse would have been required to commence distribution of the participant’s benefit on a more accelerated timeframe.
- Hardship Withdrawals – As a result of the Windsor ruling, a participant will be permitted to receive a hardship withdrawal from a defined contribution plan (to the extent the plan generally permits hardship withdrawals) as a result of a legally married same-sex spouse’s medical expenses, tuition costs and funeral expenses. Previously, hardship withdrawals were only permitted for such expenses if the plan provided for hardship withdrawals relating to medical, tuition and funeral expenses incurred by the participant’s “primary beneficiary” and the same-sex spouse was designated as such.
Health and Welfare Plans
- No Imputed Tax on Health Plan Costs – Previously, if the same-sex spouse of an employee was covered under the employee’s group health plan, the portion of the cost associated with the coverage for the same-sex spouse was taxable to the employee and the employer was required to report and withhold applicable income and payroll taxes. As a result of the Windsor ruling, the coverage for a legally married same-sex spouse will not be subject to income or payroll taxes and the employer will have no reporting and withholding obligation.
- FSAs, HRAs, and HSAs – Qualifying medical expenses incurred by the legally married same-sex spouse of an employee may be eligible for tax-free reimbursement under flexible spending arrangements, health reimbursement arrangements and health savings accounts. Previously, such reimbursements were taxable to the employee.
- COBRA – A legally married same-sex spouse covered as a dependent under an employee spouse’s group health plan can constitute a “qualified beneficiary” and elect COBRA continuation coverage upon a “qualifying event” (employee’s termination of employment, divorce, death, etc.).
- HIPPA Special Enrollment Rights – An employee may make a mid-year election to add a his legally married same-sex spouse to the employee’s health plan coverage if the spouse loses coverage under another plan to the same extent as applies to opposite-sex spouses.
Employer-Provided Fringe Benefits
Many employers offer fringe benefits (e.g., no-additional-cost service benefits, employee discounts, and adoption assistance) to employees and their spouses and dependents. As a result of the Windsor ruling, these fringe benefits may be provided to the legally married same-sex spouse of an employee on a tax-free basis to the same extent as is applicable to opposite-sex spouses.
Although the Windsor ruling in many ways simplified the administration of certain employee benefit plans, there are number of open issues that were not addressed in the Supreme Court’s opinion. Below is a high-level overview of those open issues:
- The Windsor ruling does not address the extent to which same-sex spouses are required to be regarded as “spouses” under federal law if the same-sex couple were married in a state that permits such marriage but who now reside in a state that does not recognize same-sex marriage. Section 2 of DOMA, which was not at issue in the Windsor ruling, permits states to refuse to recognize a same-sex marriage that was performed in another state.
- A key question for employers is whether the Windsor ruling will be given retroactive effect. If given retroactive effect, a same-sex spouse could again claim previously denied benefits for past years and employees could claim refunds for taxes paid for the cost of benefits provided to their same-sex spouses. Employers may seek refunds for their portion of payroll taxes paid for the cost of such benefits and may be required to amend tax forms (e.g., Form 941 and Form W-2) for open tax years.
- The Windsor ruling also does not address whether health plans may elect to limit coverage to spouses of the opposite sex.
We expect that federal regulators will issue guidance pertaining to the implications of the Windsor ruling. In the meantime, employers should review plan documents, summary plan descriptions, and other governing documents (e.g., insurance policies), as well as payroll systems and procedures to determine whether any changes are needed in response to the Windsor ruling.
If you have any questions regarding the Windsor ruling, or any other related issues, please contact the Pepper attorney you generally work with or one of the authors.
1 Currently, same-sex marriage is permissible in Connecticut, Delaware (effective July 1, 2013), the District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota (effective August 1, 2013), New Hampshire, New York, Rhode Island (effective August 1, 2013), Vermont and Washington.
2 The Windsor ruling would also apply in the same way to any 401(k) or other type of defined contribution plan that permits participants to receive payment in the form of joint and survivor annuity.
Michael A. Kadlec, Andrew J. Rudolph and Jonathan A. Clark