The Supreme Court Strikes Down DOMA—Benefit Plan Sponsors Have Much to Consider
Today, in its decision in United States v. Windsor, No. 12-307 (U.S. June 26, 2013), the Supreme Court of the United States ruled that the Defense of Marriage Act ("DOMA") is unconstitutional. DOMA provided that, for federal purposes, same-sex marriages would not be recognized, even if such marriages were recognized for state law purposes. The Supreme Court's ruling means that, for federal purposes, a same-sex marriage must be viewed on the same terms as an opposite-sex marriage, generally leaving the definition of "spouse" to the states. Therefore, in states that already recognize same-sex marriage, there is no longer a barrier to that recognition under federal law. As an initial matter, any plan that includes DOMA's definition of "spouse" will require an amendment. While the decision addresses the constitutionality of same-sex marriage, it does not address numerous implications that follow from the ruling.
Currently, 12 states—Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington State—and the District of Columbia have enacted laws that recognize same-sex marriage. The Supreme Court noted that DOMA affects over 1,000 federal laws, and related regulations. Among the significant effects the ruling will have, there are a number of benefit-related issues that require consideration.
Eleven Benefit-Related Issues to Review
Below is a list of certain significant issues that plan sponsors and benefits professionals should review in connection with the Supreme Court decision. This is intended to be a high-level review and not exhaustive. Many questions remain unanswered, and we expect that new issues will become apparent as we review further. However, for participants in those states where same-sex marriage is recognized, changes in administration may be required now.
- Hardship distributions. The Pension Protection Act of 2006 expanded the circumstances under which hardship distributions may be triggered to include hardship of a domestic partner who is not a dependent; plans were permitted (but not required) to adopt the broadened definition. Regardless of whether a plan was amended to adopt the broadened definition, in the absence of DOMA, a hardship relating to a same-sex spouse will become covered to the same extent as an opposite-sex spouse.
- Qualified Domestic Relations Orders ("QDROs"). Currently, the rules on QDROs do not permit same-sex spouses to be alternate payees, and employers are not required to comply with orders in which a same-sex spouse is named as the alternate payee. Without DOMA, this will no longer be the case and QDROs relating to same-sex spouses will be valid.
- Qualified Joint and Survivor Annuity ("QJSA") and Qualified Pre-Retirement Survivor Annuity ("QPSA"). Currently, defined benefit plans (and defined contribution plans that have elected to offer survivor annuity options) must provide automatic survivor benefits to a spouse in the form of a QJSA (for benefits paid after retirement) and a QPSA (if the participant dies before retirement) unless the participant elects otherwise with his or her spouse's consent. At present, spousal rights under a QJSA or QPSA are not required for a same-sex spouse and are available only if the plan sponsor elected to grant such rights. Without DOMA, these survivor benefits should be available to same-sex spouses regardless of whether the plan provides any broader rights.
- Required Minimum Distributions ("RMDs"). Currently, same-sex spouses cannot defer RMDs until April 1 of the year following the year in which the spouse would have reached age 70½ but, rather, must receive the entire interest of the deceased employee within five years. In the absence of DOMA, a surviving same-sex spouse that inherits benefits before RMDs have begun should have the same rights as currently available for opposite-sex spouses to delay distributions until the time when the deceased employee would have reached age 70½.
- Spousal consent. Currently, plans that provide for a QJSA require spousal consent for loans and for naming a non-spouse beneficiary. Without DOMA, same-sex spouses should have such consent rights.
Health and Welfare Plans
- Health insurance generally. Benefits provided to non-spouses (who are not "dependents" for federal income tax purposes) are generally taxable to an employee. Such benefits for federally recognized spouses are not taxable. In the absence of DOMA, same-sex spousal benefits will no longer be taxable.
- Tax-equalization agreements. Currently, employers sometimes provide tax-equalization or "gross-ups" to reimburse the covered employee for taxes on health benefits provided to same-sex spouses. Such agreements should not be necessary without DOMA.
- Qualifying event. Currently, under a cafeteria plan, marriage and certain events relating to spouses are qualifying events that permit an employee to modify the employee's elections under the plan. In the absence of DOMA, marriage of same-sex spouses and other spousal-related events should be recognized as qualifying events under the cafeteria plan rules.
- Consolidated Omnibus Budget Reconciliation Act ("COBRA"). Currently, COBRA requires that plans provide continuation coverage to "qualified beneficiaries," which includes spouses. Without DOMA, continuation coverage should be required to be offered to same-sex spouses.
- Health Flexible Spending Account ("FSA"). Currently, tax-favored treatment under an FSA is not available to an employee's same-sex spouse. Tax-favored treatment should be available in the absence of DOMA.
- Health Insurance Portability and Accountability Act ("HIPAA"). Currently, group health plans offering coverage to spouses must provide special enrollment rights under certain circumstances. Pursuant to DOMA, special enrollment rights are not extended to same-sex spouses. Such rights should otherwise be available in the absence of DOMA.
Presently, as previously noted, 12 states and the District of Columbia recognize same-sex marriage, and the effective repeal of DOMA by the Supreme Court does not necessarily answer any number of questions, including the following:
- Must a same-sex marriage in a state or district permitting such marriage be recognized in a state that does not otherwise permit same-sex marriage?
- What is the effect on a company's plans if it has employees in several jurisdictions, only some of which recognize same-sex marriages? Will or should employers use a single standard recognizing same-sex spouses (e.g., state of residence, state of employment, state of marriage certificate, or state of employer's headquarters)?
- Will it be discriminatory to administer a plan recognizing same-sex spouses residing in one state but not in another state that does not recognize such unions?
- Should plans be administered prospectively from the date of the decision, or must there be retroactive application?
- Will there be specific grace periods for making corrections pursuant to this change in law?
- Will a prior beneficiary or other election that normally requires spousal consent (because a same-sex partner was not deemed to be a spouse at the time of election), or failure to offer a benefit at all to a same-sex spouse (such as a QJSA), continue to be valid if the same-sex spouse were to be recognized as a spouse (whose consent would then be required)?
These and other issues will need to be considered in light of the requirements of applicable law to benefit programs and also after reviewing carefully the effect of each plan's provisions, as currently drafted. We expect (and hope) that guidance from the government that answers the existing questions will be forthcoming. We will keep you advised as we learn more.
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To ensure compliance with certain IRS requirements, we inform you that any tax advice contained in this publication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.