The Supreme Court’s decision striking down the federal Defense of Marriage Act is being hailed as a huge victory for same-sex couples, but the ruling makes benefits administration for employers even more complicated than before.
“It’s not even crystal clear that anybody knows what the right legal answer is with respect to those people living in the 38 states that don’t recognize same-sex marriage,” says Todd Solomon, a partner in the employee benefits practice of McDermott, Will & Emery, and author of Domestic Partner Benefits: An Employer’s Guide. “It’s really easy in the other 12 states [that do recognize same-sex marriage] — that’s what we know — but we’ve got a huge, open $64,000 question with respect to the rest of the people. And that’s a big problem for employers. I think they’re going to be very puzzled and they’re going to want guidance from the IRS.”
The court decision notes there are over 1,000 federal laws containing provisions specifically applicable to spouses that will be affected by its ruling. At this point, the ruling makes it harder for multistate employers to administer benefits, believes Leslye Laderman, a principal in the Knowledge Resource Center with Buck Consultants.
“We don’t know, exactly, the full implications of the ruling,” she says. “In the Windsor case, the plaintiff, Edith Windsor, lived in New York. New York is a state that recognizes same-sex marriage and the court very much was looking at that, and that DOMA was stepping on the rights of states to regulate that. But it really isn’t clear from the ruling exactly what the implications are for someone who’s living in a state that does not recognize same-sex marriage. More guidance is needed.”
For employees who were married in states that recognize same-sex marriage and still reside there, however, the DOMA ruling “is a significant gain in rights both on the pension side and on the health benefits side,” says Solomon.
For others, the decision “leaves many questions to be resolved by subsequent regulation and undoubtedly litigation,” said George W. Schein, lawyer with Thompson Hine’s employee benefits and executive compensation practice, in a statement. “Conspicuously unresolved is the interplay between the states that recognize same-sex marriage and those that do not.”
With respect to defined benefit plans, same-sex spouses will now be entitled to survivor annuity rights. “Say a participant turns 65 and retires under a pension plan, including a frozen plan, and their benefit was $1,000 a month. If they die and have a surviving spouse, the surviving spouse would get a benefit of $500 a month – at least half of the participant’s annuity – for the rest of their life,” explains Solomon. “That’s a significant survivor benefit.”
With the DOMA ruling, this survivor benefit also now applies to qualified pre-retirement survivor annuities. “If somebody dies pre-retirement – before they start drawing their pension – that means their surviving spouse gets at least 50% of their benefit for the [duration of the] surviving spouse’s life,” says Solomon.
Combined, these survivor annuity rights represent “a big gain for same-sex couples, a pretty significant benefit that they were previously typically excluded from,” says Solomon.
Under 401(k) plans, spouses are automatically deemed beneficiaries so the DOMA decision means same-sex spouses will now have beneficiary rights they weren’t previously entitled to.
For self-funded employers, there’s never been an obligation to cover same-sex spouses, although many plans do, says Solomon. But because DOMA defined marriage as between one man and one woman, “a lot of employers relied on the DOMA definition and said ‘we’re only covering opposite-sex spouses under our plan,’” he says. With DOMA ruled unconstitutional, it now “gets very difficult for an employer [in any state] to deny coverage to a same-sex spouse in a self-funded plan.”
Self-insured plans will “really need to think about extending coverage to same-sex spouses or be at risk of discrimination claims,” says Solomon.
Insured plans, meanwhile, “are already accustomed to covering same-sex spouses in states that recognize same-sex marriage,” says Solomon. “But with respect to other states, to the extent they’re not extending coverage, they’ll have to extend coverage as well, presumably.”
Since DOMA’s been struck down, health coverage for same-sex partners will no longer be a taxable benefit under federal tax law. One of the important questions is whether the decision will have retroactive implications. “A lot of employers have structured their payroll taxes and benefit plan side of things in accordance with DOMA and will now need to think through what their reactions will be,” says Joanne Youn, an employee benefits attorney at Caplin & Drysdale.
“Many constitutional cases do have retroactive implications,” notes Solomon. “In terms of tax refunds, I think you could potentially see a number of employees filing for tax refunds for taxation of benefits, and you may see employers filing for Social Security tax refunds because employers pay payroll taxes on the income they impose on employees covering same-sex spouses.”
It’s not clear retroactivity applies as the Supreme Court did not specifically address it but “it’s an open question and one that I think will be pursued – how far does this go back and will employers see an uptick in claims for spousal death benefits, for example?” says Solomon.
Solomon recommends four steps for employers:
1. Take stock. Look at what you do already for same-sex spouses, compare it to what’s legally required now and see what gaps exist. “Some employers are going to have small gaps and some are going to have fairly large gaps,” he says.
2. Figure out how to implement any new benefits as soon as possible. “Some of this presumably takes effect right now so, for example, putting in procedures so that if somebody with a same-sex spouse were to die tomorrow, how would you treat that? Make sure you understand the rules and have policies in place,” he says.
3. Get everything documented. “From a qualified benefit plan perspective, typically you have until the end of the year to make discretionary amendments and conforming amendments,” says Solomon. “The IRS might issue some guidance and give more time but, I would aim to amend plans by the end of this calendar year, for calendar-year plans, and certainly by the end of the plan year for other plans.”
4. Update tax policies and payroll procedures to start taxing benefits in accordance with the new rules. “Stop taxing the benefits for federal income tax purposes starting as soon as possible,” says Solomon.
“It’s hard because none of this is going to happen overnight but I think employers just have to do their best to get geared up to address seemingly quite a few issues,” says Solomon. “It’s a little more complicated now than it was before, actually.”
‘Don’t be first out the gate’
Before employers communicate anything to employees, it’s important to think through the issues “and not be the first one out of the gate with extensive communications on what this means,” says Solomon.
“The important thing is to not say too much until employers figure out how they’re going to handle some of the open questions,” he says. “What happens if someone is married in New York [which recognizes same-sex marriage] but lives in Florida [which does not recognize same-sex marriage]? Is the employer going to continue to tax them on the benefits, treating them as unmarried because they live in Florida? Or will they not tax the benefit because the state of ceremony should govern and that’s good enough? Employers need to make up their mind on that, and there’s no guidance to know what the legally correct answer is on that.”
Employers should expect questions, says Roberta Chevlowe, a senior counsel in Proskauer’s employee benefits, executive compensation and ERISA litigation practice center and a member of the firm’s DOMA taskforce. However, she cautions “employers will need to consider carefully the scope of the decision and various issues relating to the implementation and effective date of the decision with regard to these issues.”
The ruling could also have implications for spousal rights under other legislation, such as COBRA and the Family and Medical Leave Act.
“If someone’s living in a state that recognizes same-sex marriage and has a same-spouse, now the spouse will have full COBRA rights,” says Laderman. “What we don’t know is what happens in a state where they don’t recognize same-sex marriage? An employer can extend COBRA-like coverage to same-sex spouses even if the state doesn’t recognize the marriage but it does raise issues.”
Similarly, FMLA is a federal law and rights are extended to spouses. “Are employers required to [recognize same-sex spouses] in other states [that don’t recognize same-sex marriage]? We don’t know that, but an employer could certainly extend that type of coverage if it wanted to,” says Laderman.
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