Impact of Recent Same-Sex Marriage Developments on Employee Benefit Plans

    Locke Lord Publications

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    E. Philip Bush // T: 214-740-8542 // epbush@lockelord.com 
    Edward A. Razim, III // T: 713-226-1544 // erazim@lockelord.com

    Update: Since this article was originally published on September 11, 2013, the DOL has issued new guidance. This revised article reflects those changes.

    This article describes steps that should be taken regarding employee benefit plans in light of the Supreme Court’s recent decision in U.S. v. Windsor declaring part of the federal Defense of Marriage Act (“DOMA”) unconstitutional, and subsequent federal agency guidance, including IRS Revenue Ruling 2013-17 and Department of Labor Technical Release 2013-04, under which same-sex couples who are legally married in jurisdictions that recognize same-sex marriages are thereafter considered married for federal tax and employee benefits purposes regardless of where they reside.

    Background on DOMA and Windsor
    DOMA was signed into law in 1996 and contains two main provisions. Section 2 of DOMA provides that U.S. states, territories, possessions and Indian tribes are not required to recognize same-sex marriages performed in other jurisdictions. Section 3 of DOMA provides that for purposes of all federal laws, regulations, and interpretations thereof, the word “marriage” is limited to a definition of a union of one man and one woman, and the word “spouse” refers only to a person of the opposite sex.

    The plaintiff in Windsor was married in Canada to a same-sex partner and resided in New York. Upon her spouse’s death and subsequent distribution of her spouse’s estate, the plaintiff sought to claim the federal estate tax exemption for surviving spouses but had her claim rejected because she did not meet the definition of “spouse” under Section 3 of DOMA. In Windsor, the Supreme Court held that Section 3 of DOMA is unconstitutional under the Due Process Clause of the Fifth Amendment. However, the parties to the litigation did not address the constitutionality of Section 2 of DOMA, and the Supreme Court did not consider the question. Therefore, pending further litigation, Section 2 of DOMA has not been overturned or ruled unconstitutional. The Supreme Court’s ruling in Windsor became effective on July 23.

    Recognition of Same-Sex Marriage Under State Law
    Because Section 2 of DOMA has not yet been ruled invalid or unconstitutional, individual states may still refuse, for state law purposes, to recognize same-sex marriages performed in other jurisdictions. Thirty-five states have either passed legislation or amended their state constitutions to provide that same-sex marriages performed in other jurisdictions are not recognized or given effect.

    Summary of Federal Agency Guidance
    Internal Revenue Service
    On August 29, the IRS issued Revenue Ruling 2013-17 (the “Revenue Ruling”) and two accompanying sets of Frequently Asked Questions. The Revenue Ruling provides that for all federal tax purposes, including for employee benefits, a same-sex couple will be considered married if the couple was married in any jurisdiction (including jurisdictions outside the United States) that recognize such marriages, regardless of where the individuals currently reside. Thirteen states currently permit same-sex marriages: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington, as well as the District of Columbia. Individuals who have entered into civil unions, domestic partnership, or other similar arrangements that are not denominated as marriages under state law are not considered married for federal tax purposes.

    One set of Frequently Asked Questions issued in connection with the Revenue Ruling (the “Same-Sex Marriage FAQs”), which is applicable prospectively beginning on September 16, 2013, provides several key items of guidance:

    • It states that “[a] qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.”
    • It provides that individuals in same-sex marriages may file amended returns for open taxable years (generally 2010, 2011 and 2012) to claim refunds of income tax and employment tax paid with respect to health or fringe benefits provided to a same-sex spouse that were previously not excludable from taxable income.
    • An employer may also claim refunds for its share of employment tax paid with respect to such health or fringe benefits. This is true even if the employer is unable to locate the employee who received the benefits.
    • Finally, the Revenue Ruling states that the IRS “intends to issue further guidance on the retroactive application of the Supreme Court’s opinion in Windsor to other employee benefits and employee benefit plans and arrangements.”

    The Same-Sex Marriage FAQs indicate that in future guidance, the IRS will provide a streamlined administrative procedure for employers to file claims for refunds of employment tax overpayments in connection with previously taxable benefits.

    Department of Labor
    On September 18, the Department of Labor issued Technical Release 2013-04, which states that for purposes of ERISA-covered plans, “the term ‘spouse’ will be read to refer to any individuals who are lawfully married under any state law, including individuals married to a person of the same sex who were legally married in a state that recognizes such marriages, but who are domiciled in a state that does not recognize such marriages.” This definition of “spouse” is the same as the definition used in Revenue Ruling 2013-17. Therefore, benefits offered under a health and welfare plan covered by ERISA must be extended to same-sex spouses on the same basis as opposite-sex spouses, if the employee and the same-sex spouse were married in a jurisdiction that recognizes same-sex marriage. Technical Release 2013-04 does not indicate an effective date. We believe that in the absence of such an effective date, this guidance should be considered effective as of July 23, 2013, the date on which the Supreme Court’s decision in U.S. v. Windsor became effective.

    Family and Medical Leave Act
    On August 9, the Department of Labor updated Wage and Hour Division Fact Sheet 28F, which provides guidance on qualifying reasons for leave under the Family and Medical Leave Act (“FMLA”). The revised Fact Sheet includes in the definition of “Spouse” “a husband or wife as defined or recognized under state law for purposes of marriage in the state where the employee resides, including ‘common law’ marriage and same-sex marriage.” This definition of “Spouse” is contrary to the definitions used in IRS Revenue Ruling 2013-17 and DOL Technical Release 2013-04, which do not rely on a determination of marital status under the law of the state where the employee or same-sex spouse resides.

    Current State of the Law
    Qualified Retirement Plans
    As noted above, the Same-Sex Marriage FAQs indicate that qualified plans must treat same-sex spouses as spouses for purposes of meeting the requirements of federal tax law. It is unclear at this point what amendments, if any, to qualified plan documents will be required to comply with the requirements set forth in the Revenue Ruling and the Same-Sex Marriage FAQs. The Same-Sex Marriage FAQs indicate that the IRS will issue further guidance on compliance issues related to qualified retirement plans, including any requirements for plan amendments and the timing of such amendments.

    The impact of the Revenue Ruling and the Same-Sex Marriage FAQs on qualified retirement plans includes but, is not limited, to the following issues:

    • A same-sex spouse will be the default beneficiary under a qualified retirement plan if the employee did not complete a beneficiary designation form.
    • If a qualified retirement plan is subject to the qualified joint and survivor annuity (QJSA) rules, the plan will need to provide a qualified joint and survivor annuity option to a participant’s same-sex spouse.
    • The qualified retirement plan rules regarding spousal consent in connection with certain loans and distributions will apply to a same-sex spouse of a plan participant.
    • Required minimum distributions from qualified retirement plans to same-sex spouses will be calculated under the same rules that apply to opposite-sex spouses.
    • A qualified plan participant’s former same-sex spouse will be eligible to receive plan benefits pursuant to a qualified domestic relations order (QDRO).

    Health and Welfare Benefits
    Under the DOL Technical Release, same-sex spouses must be extended health and welfare benefits on the same basis as opposite-sex spouses. Under the Revenue Ruling, health benefits provided to a same-sex spouse are now excludable from taxable income for Federal income tax purposes. Again, pending further guidance, it is unclear whether an amendment to a health and welfare plan document or a cafeteria plan document will be required. It is also not clear whether this change in applicable standards constitutes a “change in status” for purposes of whether an open enrollment event exists under a cafeteria plan, and, if so, the date such a change in status would have occurred. This could be, for example, the date the Windsor decision was issued (June 26), the date the Windsor decision became effective (July 23), the effective date of Revenue Ruling 2013-17 (September 16), or the release date of Technical Release 2013-04 (September 18).

    The impact of the most recent IRS and DOL guidance on health and welfare plans includes but is not
    limited to the following issues:

    • Health and welfare benefits provided to a same-sex spouse and his or her children will not be taxable for Federal income tax purposes and will not be reported on the employee’s Form W-2. These amounts, however, may be taxable for state income tax purposes if the employee resides in a state that does not exclude the value of these benefits from income for state income tax purposes.
    • A same-sex spouse who is covered as a dependent will be eligible for continuation coverage under COBRA.
    • An employee will be able to receive reimbursements for qualifying medical expenses for a same-sex spouse (and the spouse’s children) from a health flexible spending account or a health reimbursement account, and to receive reimbursements for qualifying dependent care expenses for a same-sex spouse (and the spouse’s children) from a dependent care flexible spending account.
    • A special open enrollment period for health and welfare benefits and cafeteria plans may be necessary as a result of same-sex spouses and their children becoming eligible for such benefits.
    • Employers and employees may amend tax returns for open years to claim refunds of employment tax – and, in the case of employees, income tax – paid with respect to welfare benefits provided to same-sex spouses and their children in prior years (for further details, see the “Summary of Federal Agency Guidance” section above).

    Family and Medical Leave Act
    Under the most recent FMLA guidance, employers may limit the availability of FMLA leave to opposite-sex spouses in states where same-sex marriage is not recognized. Section 2 of DOMA has not been declared invalid or unconstitutional, which may serve as the basis for individual states to refuse to recognize same-sex marriages performed in other jurisdictions for state law purposes. This approach is in contrast with the stance taken by the IRS and by subsequent guidance issued by the Department of Labor in Technical Release 2013-04, under which a same-sex married couple’s marital status is not determined under the laws of the state in which the couple resides. The DOL’s issuance of Technical Release 2013-04 after this FMLA-related change may signal that the agency intends to change course regarding its definition of “Spouse” for FMLA purposes.

    Steps to Be Taken Pending Further Guidance
    At this time, employers and plan sponsors should begin to identify areas where benefit programs are impacted by a participant’s marital status. The impact on specific benefits offered by employers as a result of the most recent governmental guidance will likely be far-reaching. For example, an existing beneficiary designation that does not include a spousal consent because the employee’s same-sex spouse was not previously considered a spouse should be corrected, and qualified retirement plans must as an operational matter begin to offer qualified joint and survivor annuities to same-sex spouses. Pending further guidance from the IRS, plan sponsors may be required to make these and other changes by the adoption of plan amendments.

    Employers and plan sponsors should also begin contacting third-party benefits administrators and recordkeepers to determine what steps will need to be taken in order to make benefits available to same-sex spouses, as well as reviewing internal benefit and payroll information systems to determine how marital status information is recorded and updated. We will continue to monitor any guidance released by the IRS and other government agencies and will keep you informed.

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