On June 26, 2015, the Supreme Court struck down all state bans on same-sex marriage in Obergefell v. Hodges. For employers, this decision raises the issue of what changes must be made in employee benefits to reflect the decision.
For this purpose, we will look at three categories of employers: those that have already been offering benefits to same-sex spouses, those that have not previously offered benefits to same-sex spouses, and those that have been offering benefits to domestic partners.
Contents
- Employers that have already been offering benefits to same-sex spouses
- Employers that have not previously offered benefits to same-sex spouses
- Employers that have been offering domestic partner benefits
- Conclusions
Employers that have already been offering benefits to same-sex spouses
This category of employers is the least affected by the Obergefell decision. As of 2013, the Supreme Court had held (in United States v. Windsor) that federal law must recognize a same-sex marriage that was valid under applicable state law. Since then, the Treasury Department, including the Internal Revenue Service (“IRS“) and the Department of Labor have taken the position that for federal tax and ERISA purposes, any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country would be recognized for federal tax and ERISA purposes, regardless of whether it was recognized by the couple’s home state. Thus, even before the Obergefell decision, employers have been able to offer spousal benefits to same-sex spouses of employees, and the federal tax consequences were the same as if those benefits had been offered to opposite-sex spouses.
For an employer that has previously offered benefits to same-sex spouses, if all of its employees live in states that have previously both permitted and recognized same-sex marriages, no changes at all may be required. However, if any of the employees live in a state in which their marriages have not previously been recognized for state tax purposes, the employer may need to make changes in state tax withholding and reporting. Some typical changes an employer might need to make are the following:
- State tax withholding rates may need to be changed from those applicable to single employees to those applicable to married employees.
- Certain benefits (such as spousal health insurance) may previously have been subject to state income taxes if provided to a same-sex spouse, even though such benefits provided to an opposite-sex spouse were exempt. State income tax withholding will now need to be changed to reflect the fact that same-sex spouses will now be treated the same for state income tax purposes as opposite-sex spouses.
- Certain payments (e.g., for dependent care) may receive favorable state income tax treatment only if they are made to someone other than a spouse. If payments are being made to a same-sex spouse, they may in the past have received favorable treatment for state tax purposes due to the marriage not being recognized, but now must be treated like any other payment to a spouse.
- Owners of pass-through entities (Subchapter S corporations, partnerships, and sole proprietorships) may have been denied a state tax deduction for certain benefits for a same-sex spouse who is not a dependent of the owner. Such a deduction will now be available in the case of a same-sex spouse to the same extent as to an opposite-sex spouse.
Employers that have not previously offered benefits to same-sex spouses
For employers that have not previously offered benefits to same-sex spouses, a major question is the extent to which they are now required to offer such benefits. Such a requirement may arise in one of two ways. First, some spousal benefits are mandated by federal law. Second, if an employer elects to provide certain benefits to opposite-sex spouses, it may be obligated to treat same-sex spouses in a similar manner.
Spousal benefits mandated by federal law
The extent to which federal law mandates the provision of spousal benefits depends on whether the employer is a governmental employer, a church, or a private (profit-making or nonprofit) employer. The following chart shows which benefits are mandated for each type of employer.
Retirement Plans |
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| Employee Benefits Provision | Plans Covered by ERISA (plans of private businesses and nonprofit organizations) | Governmental Plans | Church Plans |
| Qualified joint and survivor and qualified preretirement survivor annuities (QJSA and QPSA) | Pension plans are required to provide qualified joint and survivor annuities as the normal form of retirement benefits in the case of married employees. This form can be waived only if both the employee and the spouse consent. If the employee dies before retirement, the plan must generally provide for a qualified preretirement survivor annuity. While it is theoretically possible for the qualified preretirement annuity to be waived by consent of the employee and spouse if the cost of such annuity is borne by the employee’s pension benefit, in most instances a plan “fully subsidizes” the qualified preretirement survivor annuity, and thus the benefit cannot be waived. | A governmental plan is not required to provide a qualified joint and survivor or qualified preretirement survivor annuity. | A church plan is not required to provide a qualified joint and survivor or qualified preretirement survivor annuity. |
| Payment of account balance at death | A retirement plan other than a pension plan (e.g., a 401(k), profit-sharing, or stock bonus plan) must either provide the QJSA and QPSA discussed in the preceding row, or provide that 100% of a participant’s remaining account balance at death must be paid to his or her spouse. | The requirement to provide a spousal benefit at death does not apply to governmental plans. | The requirement to provide a spousal benefit at death does not apply to church plans. |
| Rollovers from the plan | A qualified retirement plan must provide that if a participant or beneficiary is entitled to roll over a distribution to another retirement plan or individual retirement account (IRA), the plan will directly roll over such distribution to the other plan or IRA at the participant or beneficiary’s direction. A nonspousal beneficiary can elect to roll over only to an inherited IRA. A spouse can elect to roll over to his or her own employer plan or IRA. | Same as ERISA plans. | Same as ERISA plans. A church plan must permit the rollover by a same-sex spouse to his or her own employer plan or IRA, even if church policy does not recognize same-sex marriage. |
| Plan loans | If a participant is married, the spouse must consent to any loan from the plan to the participant. | Federal law does not impose a spousal consent requirement on governmental plans. | The requirement to obtain spousal consent to a plan loan does not apply to church plans. |
| Domestic relations orders | A plan must comply with a qualified domestic relations order, or QDRO (a domestic relations order dividing benefits, typically in a divorce, which meets certain criteria). | A governmental plan is permitted, but not required, to provide that benefits will be subject to a domestic relations order. Many governmental plans provide that they will comply with a domestic relations order which would meet the criteria for a QDRO in the case of an ERISA-covered plan. | A church plan is permitted, but not required, to provide that benefits will be subject to a domestic relations order. |
| Required minimum distribution rules | The required minimum distribution rules allow for more flexibility when a beneficiary is the spouse than when the beneficiary is a child or other nonspousal beneficiary. | Same as ERISA plans. | Same as ERISA plans. |
| Withholding on distributions | A distributee of a retirement plan who has a spouse must be permitted to elect “married” status for purposes of federal and state income tax withholding. | Same as ERISA plans. | Same as ERISA plans. |
Health Plans |
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| Employee Benefits Provision | Plans Covered by ERISA (plans of private businesses and nonprofit organizations) | Governmental Plan | Church Plans |
| Availability of health plan coverage | An employer may, but is not required to, offer health plan coverage to employees’ spouses. While the Affordable Care Act will impose certain tax penalties if employees are not covered, it does not apply to spousal coverage. Thus, a plan may exclude all spouses of its employees from health coverage. | Same as ERISA plans. | Same as ERISA plans. |
| Taxability of health plan coverage (including health reimbursement accounts, flexible benefit plans, and health savings accounts) | If an employer provides health plan coverage to an employee’s spouse (either through an employer contribution or through a pretax employee contribution), the contribution is not includible in the employee’s W-2 income, taxable to the employee, or subject to federal income tax withholding, FICA (Social Security and Medicare taxes), or FUTA (federal unemployment taxes). Benefits paid from the plan are also not taxable income. | Same as ERISA plans. | Same as ERISA plans. |
| COBRA (health care continuation) | Spouse who is covered by an employee’s health insurance is entitled to up to 36 months of health care continuation (at his or her own expense) in the event of participant’s termination of employment, or the couple’s divorce or legal separation. | Same as ERISA plans. | Same as ERISA plans. |
| HIPAA | A spouse who loses coverage under his or her own employer’s plan may be entitled to immediate spousal coverage, notwithstanding normal rules regarding when health coverage can be elected. | Same as ERISA plans. | Same as ERISA plans. |
Dependent Care Assistance Plans |
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| Employee Benefits Provision | Plans Covered by ERISA (plans of private businesses and nonprofit organizations) | Governmental Plans | Church Plans |
| Qualifying person test | Dependent care assistance benefits can be provided only for the care of a qualifying person. A spouse is a qualifying person if he or she is not physically or mentally able to care for himself or herself and lived with the employee for more than half the year. A dependent care assistance plan may, but is not required to, provide benefits for a qualifying person who is a spouse. | Same as ERISA plans. | Same as ERISA plans, except that federal laws prohibiting sex discrimination do not apply to churches. |
| Payee test | Benefits cannot be reimbursed under a dependent care assistance plan if they are paid to the spouse of the employee. | Same as ERISA plans. | Same as ERISA plans. |
Cafeteria Plans |
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| Employee Benefits Provision | Plans Covered by ERISA (plans of private businesses and nonprofit organizations) | Governmental Plans | Church Plans |
| Changes in elections | A cafeteria plan may, but is not required to, allow employees to change their elections mid-year based on certain qualifying events, including marriage and divorce. | Same as ERISA plans | Same as ERISA plans |
Prohibitions on treating same-sex spouses differently than opposite-sex spouses
If an employer is not required to provide a spousal benefit, can it elect to provide the benefit only to opposite-sex spouses but not to same-sex spouses? Four different rules must be considered in determining the answer to this question:
- Constitutional issues
- Federal nondiscrimination laws
- State nondiscrimination laws
- Contractual provisions
Constitutional issues
The Supreme Court’s decision was based on the concept that a state’s ban of same-sex marriage would violate the equal protection clause of the Fourteenth Amendment to the Constitution. Because the Fourteenth Amendment constrains both state and local governments, it appears that any attempt by a state or local government to treat same-sex marriages less favorably than opposite-sex marriages would also violate the Fourteenth Amendment. Thus, even if a state or local government is not required to provide a specific spousal benefit at all, it appears that it could not provide the benefit to opposite-sex spouses but not same-sex spouses.
Similarly, the 2013 Supreme Court decision in United States v. Windsor was based in part on the concept that the federal government could not discriminate against same-sex couples under the Fifth Amendment to the Constitution. Thus, it appears that a federal government agency could not provide benefits to opposite-sex spouses without providing them to same-sex spouses.
Federal nondiscrimination laws
No federal law explicitly prohibits discrimination based on sexual orientation. However, the Equal Employment Opportunity Commission (“EEOC”) takes the position that discrimination against LGBT employees is forbidden as sex discrimination by Title VII of the Civil Rights Act of 1964. In effect, the theory is that if, for example, spousal benefits are provided to a male employee’s wife but not to a female employee’s wife, the employer has discriminated against the female employee.
Title VII applies to any employer, other than a church, if it has 15 or more employees who worked for the employer for at least twenty calendar weeks (in this year or last). If the EEOC’s position is accepted by the courts, it would preclude any covered employer from providing benefits to opposite-sex spouses that it did not also provide to same-sex spouses.
State nondiscrimination laws
In the case of an employer with less than 15 employees, Title VII would not apply. However, some states have laws the explicitly bar discrimination on the basis of sexual orientation. Even among those that do not, legislation barring discrimination on the basis of sex might be construed (in line with the EEOC’s interpretation of federal law) to preclude an employer from providing benefits to opposite-sex spouses that it did not provide to same-sex spouses.
Contractual provisions
In the case of an employer that is a government contractor, often the contracts with government agencies will require a covenant not to engage in discrimination of various kinds. To the extent that an employer has agreed to a contract that includes provisions barring discrimination based on sexual orientation (or perhaps provisions barring discrimination based on sex), such contractual provisions may prevent an employer from providing benefits to opposite-sex spouses that it does not also provide to same-sex spouses.
Retroactivity
One open question is the degree to which the new rules will be applied retroactively. For example, suppose that a governmental employer has previously permitted an employee to elect at retirement whether to receive a full benefit, or to receive a lesser benefit in exchange for a survivor benefit to the spouse. Because the state did not recognize same-sex marriage, employees with same-sex spouses were not given this option. Must the state now permit employees who retired in the past to make new elections? Or if a retiree has died, must it pay spousal benefits for past years to reflect the benefits the same-sex spouse would have received if the employee had been permitted to make, and had made, the election?
When the federal government began recognizing same-sex marriage based on the Windsor decision, the IRS provided guidance which generally a) permitted employers to apply the new rules going forward, but without imposing them retroactively, and b) permitted but did not require employers to treat employees in same-sex marriages as though they had gotten married on the date of the Windsor decision for purposes of making new cafeteria plan elections. It is unclear to what degree similar rules will apply to employers newly obligated to provide spousal benefits to same-sex spouse under the Obergefell decision. While the IRS rules would clearly not be applicable to benefit decisions that are not mandated by IRS rules, at least some courts may look to them by analogy.
On the other hand, the IRS rules were intended for a narrow purpose: dealing with the issue of whether a plan would retain federal tax benefits as a “qualified” plan. In the event a specific participant or beneficiary disadvantaged by the previous rules were to litigate, a court could take the position that the individual should be put into the same position as he or she would have been in absent rules now found unconstitutional.
Employers that have been offering domestic partner benefits
Employers in states that have adopted same-sex marriage have increasingly been eliminating domestic partner benefits. For the reasons set forth below, we can expect the Supreme Court’s decision to exacerbate this trend.
In many instances, domestic-partner policies were originally adopted based on a perception that employees with same-sex partners were disadvantaged relative to those with opposite-sex partners, due to the fact that same-sex marriage was not recognized under applicable state law. In most instances, the policies apply only to same-sex partners, although in some they are also available to unmarried opposite-sex partners. The question therefore becomes whether to eliminate these policies now that same-sex marriage is available to all couples. Some factors employers are considering are set forth below.
Administrative issues
A marriage is typically easy to document. Governmental agencies maintain copies of marriage certificates. A marriage can be ended only on divorce or death, either of which is also documented by a government agency. Thus, it is typically possible to determine with certainty whether an employee is or is not married. (Of course, this may be more of an issue in instances in which a common-law marriage is a possibility, but these represent a small fraction of marriages.)
By contrast, except in those states with registered domestic partnerships, the existence of a domestic partnership can be much harder to document. Typically, an employee must file an affidavit with the employer to establish a domestic partnership as a precondition for benefits. However, if there is no formal divorce-type filing, it can be difficult to determine whether or when a domestic partnership ends. Indeed, there could be instances in which an employee marries without ever formally ending a domestic partnership. (Bigamy laws would, of course, apply to an employee who remarried without ending a prior marriage, but those laws do not typically apply to domestic partnerships.)
Adverse selection
Some employers have expressed a concern that employees will claim domestic partnerships with individuals with serious health conditions purely to get health benefits. Such actions could increase employer health insurance costs.
In the case of marriage, such concerns are typically ameliorated by the fact that a marriage involves numerous rights and obligations that make it unlikely someone would marry simply in order to get health benefits. However, a domestic partnership typically involves far fewer rights and obligations, and is easier to dissolve, than a marriage.
Equal protection issues
Many domestic partner benefits are available only to same-sex domestic partners, not opposite-sex ones. One concern of employers is that they could face lawsuits from opposite-sex couples denied the opportunity to obtain benefits as domestic partners. After all, if same-sex couples can get benefits without marriage, why should opposite-sex couples be denied the same right? The EEOC position described above may actually exacerbate that concern, because issues could be raised if, for example, the female domestic partner of a female employee were provided benefits, while the female domestic partner of a male employee was ineligible for such benefits.
Tax issues
In instances in which domestic partner benefits are offered, they often have quite different tax consequences than spousal benefits. For example, an employer’s provision of health benefits to a spouse does not give rise to income for purposes of the employee’s federal taxes. However, unless the domestic partner is a dependent of the employee under federal tax law (which many are not), an employee will be taxable on health benefits provided to a domestic partner. Such benefits will also have FICA (Medicare and Social Security) tax consequences for the employer. An employer may not wish to incur the tax, or may be reluctant to engage in the administrative complexity of determining which domestic partners are dependents and engaging in tax reporting and withholding in the case of those who are not.
Other issues
Of course, some employers may wish to retain domestic partner policies. In some instances, domestic-partner policies already cover opposite-sex as well as same-sex couples. For example, some employers have wanted to protect senior citizens reluctant to marry due to the effect on Social Security benefits. These reasons may continue to exist even after passage of marriage equality. Moreover, even those employers that decide to eliminate domestic partner benefits may wish to provide a lengthy transition period for domestic partners to have time to marry, or to make other arrangements for benefits. However, we can expect to see domestic partner policies diminishing in frequency now that the original justification for them (the inability of same-sex couples to marry) has ended.
Conclusions
For employers that have already been providing spousal benefits to same-sex spouses on the same terms as to opposite-sex spouses, the Supreme Court’s decision in Obergefell v. Hodges will have little impact, except for the need to reexamine state tax withholding and reporting. However, those employers (other than churches) which have historically provided benefits to opposite-sex but not same-sex spouses, the decision will have a much larger impact. Some spousal benefits are now mandated. And even in the case of spousal benefits that are not, it may be impermissible to provide a benefit to an opposite-sex spouse that is not also provided to a same-sex spouse.
Conversely, employers that are currently providing benefits to nonspousal domestic partners may wish to reconsider such policies. In many instances, the decision will be made to phase out such benefits after a reasonable transition period.