March 10, 2014
By Pete J. Shuler and Mark D. Swanson, J.D., CEBS
The Defense of Marriage Act (DOMA) was enacted in 1996. Section 3 defines marriage for purposes of federal law as a legal union between one man and one woman, and “spouse” refers only to a person of the opposite sex who is a husband or a wife. Since DOMA was enacted, various states have passed laws recognizing same-sex marriages or other arrangements such as civil unions and domestic partnerships, but because employee stock ownership plans (ESOPs) and most other employee benefit plans are governed by federal law, benefit plans were not required to recognize a same-sex spouse as a spouse for benefit plan purposes. The Supreme Court’s ruling in June 2013 in U.S. v. Windsor, however, affects ESOPs, other benefit plans, and many areas of federal tax law in that it changed the definition of spouse for federal tax purposes.
In Windsor, the Court ruled Section 3 of DOMA unconstitutional and emphasized that it interfered with the traditional power of the states to define marriage. The ruling does not require states to recognize same-sex marriage, and because some states recognize same-sex marriage and others do not, the ruling’s immediate impact on employee benefit plans was unclear and raised many questions: If a couple is married in a state that recognizes same-sex marriage but moves to a state that does not, which state’s laws determine marital status? Will a plan administrator need to track the legal status of a spouse when participants move to different states? What is a person’s status for federal tax purposes? While there are still unanswered questions, IRS Revenue Ruling 2013-17 provides some guidance.
The IRS concluded that for federal tax purposes the terms “spouse,” “husband,” “wife,” and “husband and wife” include an individual married to a person of the same sex if the marriage took place in a state, District of Columbia, or U.S. territory with laws that authorize marriage of two persons of the same sex. In other words, the IRS will follow the laws of the “state of celebration.” It is important to note, though, that this requires marriage. Domestic partnerships and civil unions are not recognized on the same basis as marriage.
The Windsor Effect
As of February 2014, California, Connecticut, Delaware, Hawaii, Illinois (Cook County only until June 1, 2014, when same-sex marriage is recognized statewide), Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, Vermont, and Washington, in addition to the District of Columbia, permit same-sex marriage. Domestic partnerships or civil unions are recognized in Colorado, Hawaii, Illinois, Nevada, New Jersey, Oregon, and Wisconsin. States not listed do not recognize or permit same-sex marriage, domestic partnerships, or civil unions. Many states have introduced legislation to recognize same-sex marriage, and there are numerous lawsuits working their way through state courts that likely will result in law changes.
As a result of the Windsor decision, administrators of ESOPs and other benefit plans should consider certain issues:
- Beneficiary designations. A spouse is the participant’s beneficiary unless the spouse properly consents to a different beneficiary. Effective Sept. 16, 2013, this rule also applies to same-sex spouses. The guidance does not shed light on prior beneficiary designations that did not obtain consent because consent wasn’t necessary prior to Windsor. Although the guidance does not require that participants be notified that the current beneficiary designation might no longer be valid, the change should be communicated to participants. This is also a good time to remind all participants of the importance of keeping beneficiary designations up to date.
- Spousal consent for distributions and direct rollovers. For plans subject to the qualified joint and survivor annuity (QJSA) or qualified preretirement survivor annuity (QPSA) requirements, spousal consent is required for distributions in a form other than the QJSA or QPSA. Spousal consent may also be required for a participant loan. For distributions to a spouse beneficiary, a same-sex spouse may now elect a direct rollover to his or her own individual retirement account (IRA) or employer plan.
- Plan documents. Review and determine if your plan’s definition of “spouse” needs revision.
- Human resource manuals, systems, processes, and procedures. Update to reflect and accommodate changes. The documentation requested to verify same-sex marital status should be the same as that used for opposite-sex couples.
- Healthcare plans. An employee may file for a refund of federal income taxes paid on the value of healthcare coverage provided to a same-sex spouse for all open tax years. The employer may also file for a refund of Federal Insurance Contributions Act (FICA) and Medicare taxes for open tax years. An employer may not claim a refund for over-withheld income taxes paid on the value of health coverage provided to a same-sex spouse but may adjust over-withholding for 2013, provided the employee is repaid or reimbursed by the end of the year.
- Flexible spending and health savings accounts. Eligible expenses for a same-sex spouse can be reimbursed from these accounts.
- COBRA and HIPPA rights. Consolidated Omnibus Budget Reconciliation Act (COBRA) notices now must be provided to a participant’s same-sex spouse. In addition, the Health Insurance Portability and Accountability Act (HIPAA) now permits a spouse to enroll in his or her same-sex spouse’s healthcare plan upon loss of coverage.
Two areas that warrant special attention are provisions under the Family and Medical Leave Act (FMLA) and state provisions, such as state and local income tax withholding rules. One provision under the FMLA allows eligible employees to take protected leave to care for a seriously ill spouse. For this purpose, though, a spouse is determined under the state law where the employee resides, not where the employee works.
It also still is unclear what action should be taken to comply with state and local provisions. Should income still be imputed on the value of health plan coverage for state and local withholding for those states that don’t recognize same-sex marriage? Will Form W-2 information need to be calculated differently for state and federal tax purposes? The hope is that states will issue guidance quickly, but for now these issues remain unclear.