After publication of this article, the Department of Labor revised regulation under the Family & Medical Leave Act to provide protections for legally married same-sex spouses, regardless of their state of domicile. Moreover, the discussion does not take into account the Supreme Court’s later decision in Obergefell v. Hodges, which struck down bans on same-sex marriage. An updated version of the information in this article, taking account of these and other recent developments, can be found at this link.
On June 26, 2013 in United States v. Windsor, the Supreme Court struck down section 3 of the Defense of Marriage Act (“DOMA”), which had barred federal recognition of same-sex marriages. On August 29, the Treasury Department and the Internal Revenue Service (“IRS”) announced that all same-sex marriages legal in the jurisdiction in which performed would be recognized for federal tax purposes, even if not recognized in a couple’s home state. On September 18, the Department of Labor (“DOL”) announced that the same rule would apply for purposes of the Employee Retirement Income Security Act of 1974 (“ERISA”).
What is the effect of the Supreme Court decision and the guidance from Treasury, IRS, and DOL on employee benefit plans? This article deals separately with the effect on plans subject to ERISA (plans other than governmental or church plans), plans maintained by governmental entities for their employees (governmental plans), and church plans.
The effect of the Supreme Court’s decisions and the agency guidance will depend on what benefits the employer is currently providing to same-sex spouses or domestic partners, and whether the employer wishes to avoid providing more benefits than are legally required. Each of the possible situations is discussed below.
1. Employer Currently Provides Spousal Benefits (But Not Domestic Partner Benefits), and Is Willing to Extend Benefits to Same-Sex Spouses
Going forward, the simplest choice for an employer is simply to treat same-sex spouses the same way it treats opposite-sex spouses. This has several immediate consequences:
- If the employer maintains a pension plan and an employee in a same-sex marriage retires, the normal form of benefits under the plan should be a qualified joint and survivor annuity for the life of the employee and the spouse. An employee should not be permitted to elect any other form of benefits without the consent of the spouse.
- If the employer maintains a pension plan and an employee in a same-sex marriage dies with a vested benefit under the plan, the spouse should receive a qualified preretirement survivor annuity unless both the employee and the spouse have elected out of such annuity.
- If the employer maintains a retirement plan other than a pension plan (e.g., a 401(k) plan), and an employee in a same-sex marriage dies with a vested benefit under the plan, the spouse should receive the entire death benefit under the plan.
- If a same-sex spouse is entitled to receive death benefits under an employer’s retirement plan and instead elects to have them directly rolled over to another plan, the spouse should be permitted to use any kind of plan to receive the rollover that would be permitted in the case of any other spouse, rather than being limited to the plans that would be available to a nonspousal beneficiary.
- If an employee with a same-sex spouse applies for a plan loan, the spouse must now consent to the loan before it can be provided.
- A retirement plan must comply with any qualified domestic relations order that transfers a portion of the employee’s benefits to a same-sex spouse or former spouse.
- An employee with a same-sex spouse should be allowed to take into account the spouse’s life expectancy in calculating the minimum distribution required under Internal Revenue Code section 401(a)(9). Similarly, minimum distributions for after-death distributions to a same-sex spouse should be calculated the same as for any other spouse.
- If a 401(k) plan provides for hardship distributions, or a 457(b) plan provides for distributions on account of an unforeseeable emergency, the hardship or unforeseeable emergency of a same-sex spouse can now be taken into account to the same extent as would apply in the case of any other spouse.
- If the employer maintains a health plan with spousal coverage, any new employee with a same-sex spouse should be permitted to elect spousal coverage under the plan. A same-sex spouse should be permitted to elect COBRA (health care continuation) coverage under such plan under the same conditions as would apply to an opposite-sex spouse.
- If the employer maintains a cafeteria plan, any new employee with a same-sex spouse should be treated as married for all purposes under the plan.
- An employee should be permitted to take family and medical leave to care for an ill same-sex spouse under the same conditions as for any other ill spouse.
If the employer’s plans include a definition of “spouse” that reflects the prior law excluding same-sex spouses, appropriate plan amendments should be made.
However, complications are introduced by the fact that there was no set beginning date for the application of the changes. The Treasury announcement stated that same-sex couples would be permitted to amend their tax returns for all years open under the statute of limitations. Guidance is expected, but not yet issued, on a variety of questions regarding the extent to which the changes should be applied retroactively in the case of employee benefit issues. The following are some examples of the questions that must be considered:
- If an employee with a same-sex spouse has already retired and begun receiving a form of pension benefits other than the qualified joint and survivor annuity, must the form of benefits be modified now? And if so, should the change be made retroactive to the first date on which benefits were paid, or should it merely apply to future payments? Should employees and their same-sex spouses be permitted to make a new election now to opt out of such form of benefits, if they so desire?
- If an employee with a same-sex spouse has already died after becoming vested in a retirement plan, is the spouse owed a benefit? And if the benefit has already been paid to someone other than the spouse, does the plan have the right to recoup the previously paid benefit?
- If a plan is making the minimum required distributions to an employee or same-sex spouse, can it discontinue all distributions until it has made up the excess amounts distributed in prior years (calculated based on treating the employee as married from the beginning)?
- A cafeteria plan (including a plan for the pretax payment of health insurance premiums) is permitted to allow for enrollment only once per year, unless certain events provided in the statute or regulations occur. An employer can permit enrollment upon marriage. But can it permit enrollment outside of the open enrollment period based on an employee’s same-sex marriage that may have occurred years ago?
2. Employer Currently Provides Domestic Partner Benefits
If an employer currently treats domestic partners as if they were married for benefits purposes to the extent permitted by prior law, the most immediate task is to determine which employees listed as domestic partners are in fact married, and to extend to them the new rights generated by the Supreme Court decision and the Treasury Department and Department of Labor guidance as described in the preceding section. For purposes of federal employee benefits law, an employee in a civil union or comprehensive domestic partnership is not treated as married (unless there is a legal marriage in addition to the civil union or domestic partnership), even if such employee has the same rights under state law as a married person. Thus, for example, a party to a civil union cannot be treated as a spouse for purpose of calculating minimum required distributions, and benefits cannot be paid to such a person pursuant to a domestic relations order unless such person qualifies as a “dependent” for purposes of federal tax law. Even if benefits are paid to a domestic partner under a domestic relations order, the benefits will be taxable to the employee (as contrasted with benefits payable to a spouse under a domestic relations order, which are taxable to the spouse).
In addition, if the same-sex spouse of an employee is covered under the employer’s health insurance or cafeteria plan, the value of the coverage was previously considered taxable to the employee in many instances. The employer should now cease to treat such coverage as taxable in calculating income tax withholding, Social Security and Medicare (“FICA”) taxes, and federal unemployment taxes. The IRS has now provided procedures for claiming a refund of previously paid taxes in such instances. And of course, COBRA rights will now apply to same-sex married couples in the same manner as they would apply to opposite-sex married couples.
3. Employer Wants to Avoid Providing Benefits to Same-Sex Spouses
What of an employer that wants to avoid providing benefits to same-sex spouses? What is the minimum recognition that must legally be given to a same-sex marriage?
The answer will depend on both federal and applicable state law. Federal law requires that a retirement plan recognize a same-sex marriage for each of the retirement plan purposes listed in the first section, other than the provisions for hardship or unforeseeable emergency distributions. It requires that family and medical leave be available to an employee whose domicile is a state that recognizes same-sex marriage. However, it does not require that a health or cafeteria plan provide spousal coverage.
To the extent that a plan is insured, state law may regulate the provisions of the insurance contracts. Thus, in some states, an insurance contract may not be permitted to discriminate between married same-sex couples and other married couples. Indeed, a state law may even require spousal coverage to be extended to individuals who would not be treated as married for purposes of federal law (e.g., those in a civil union or comprehensive domestic partnership). In the case of a self-insured health plan, it is unclear whether a state law that prohibits discrimination on the basis of sexual orientation would require an employer to treat same-sex spouses the same as other spouses. And even if it is legal to exclude same-sex spouses from benefits, such exclusions may be used to show discriminatory intent if an employer is charged with non-benefits-related violations of a state law prohibiting discrimination based on sexual orientation.
An employer that wishes to exclude same-sex spouses from benefits must also look at whether such exclusion, as a factual matter, causes discrimination against protected groups. For example, a qualified retirement plan is not permitted to discriminate in favor of highly compensated employees. And federal law prohibits discrimination based on race, sex, disability, age, and veteran status. If employees with same-sex spouses disproportionately fall into one of the protected classes, an employer may face legal problems in excluding them even if state statutes do not prohibit discrimination based on sexual orientation.
Finally, an employer that wishes to avoid granting more benefits than required by law to employees in same-sex marriages must carefully examine its plan documents. If a document says that benefits are to be provided to a “spouse,” and does not limit the definition of spouse, an employee may have a contractual right to spousal benefits even if the employer was not legally required to provide them.
Governmental plans are exempt from many of the qualification rules of the Internal Revenue Code, and from many other federal laws regarding employee benefits. However, unlike plans covered by ERISA (for which ERISA preempts many state laws), governmental plans are regulated by state constitutions and laws. In many states, constitutional or other legal provisions forbid the recognition of same-sex marriages. In others, constitutional or other legal provisions may require the recognition of civil unions or comprehensive domestic partnerships. Moreover, governmental plans themselves are often embodied in statutes, which neither the contributing employer nor the governing board of the plan may be in a position to modify. Thus, the first task is to determine the extent to which relevant constitutional and other law, and the provisions of the plan document, may require or preclude recognition of same-sex relationships.
That being said, a governmental retirement plan that does not otherwise recognize same-sex marriages will still need to allow a same-sex widow(er) of an employee to directly roll over any benefits to which he or she is entitled as a beneficiary to any plan to which any other widow(er) of an employee could roll over benefits, in order to avoid jeopardizing its qualified status. In addition, federal income tax withholding on retirement benefits must be made in accordance with the distributee’s marital status as determined under federal law, which means that same-sex marriages must be taken into account for withholding purposes. And the Family and Medical Leave Act requires that a same-sex spouse must be considered a spouse for purposes of family and medical leave if recognized as such under the laws of the jurisdiction of the employee’s domicile. Thus, for example, a Virginia governmental employer would need to recognize the same-sex marriage of any of its employees who was domiciled in Maryland or the District of Columbia for purposes of family and medical leave, even though Virginia law does not otherwise recognize same-sex marriages.
Conversely, an employer in a state that has only civil unions or domestic partnerships (but not same-sex marriage) will need to determine which of its employees in such relationships have been legally married under the laws of any other state. Even if the same benefits are being granted to employees in civil unions or domestic partnerships as to married employees, married same-sex employees will now have rollover rights under retirement plans, and treatment as married for purposes of calculating federal taxes, which are not available to couples who are not legally married.
Churches are likely to have the most flexibility in dealing with today’s decisions–but they also need to review their plans carefully to ensure that they do not accidentally grant or deny coverage.
The increased flexibility comes because of three factors. First, church plans are exempt from most provisions of ERISA. Second, state laws implementing same-sex marriage and/or prohibiting discrimination based on sexual orientation often provide exemptions for churches. Thus, for example, even a church based in Maryland could refuse to cover its employees’ same-sex spouses under a plan that covered all of its employees’ opposite-sex spouses. And third, unlike governmental plans, church plans are not subject to the equal protection provisions of the federal Constitution.
Nevertheless, a church retirement plan that does not otherwise recognize same-sex marriages will still need to allow a same-sex widow(er) of an employee to directly roll over any benefits to which he or she is entitled as a beneficiary to any plan to which any other widow(er) of an employee could roll over benefits, in order to avoid jeopardizing its qualified status. In addition, federal income tax withholding on retirement benefits must be made in accordance with the distributee’s marital status as determined under federal law, which means that same-sex marriages must be taken into account for withholding purposes.
Conversely, a church that elects to cover same-sex spouses would be in the same situation as a governmental employer that recognizes same-sex marriage. ERISA would not affect the plan, one way or the other, and now at least with respect to couples domiciled in states that recognize same-sex marriage, the employer need no longer be concerned about differing federal tax treatment of same-sex and opposite-sex spouses.
However, it is still critical to review plan language carefully. If, for example, a plan says only that it covers the “spouses” of employees, an employee with a same-sex spouse who was not covered by the plan might be entitled to sue on a contractual claim, even if nondiscrimination rules did not apply. Conversely, staff might be questioned by the congregation about misappropriation of funds if benefits went to individuals defined by applicable state law as not being spouses. Simple amendments to the plan to specify exactly who is covered could help to avoid such issues.