The U.S. Supreme Court's ruling in June declaring part of the Defense of Marriage Act of 1996 unconstitutional has left many employers confused as to whether they need to change their benefits policies for employees in same-sex partnerships.
The Court ruled in United States v. Windsor that Section 3 of DOMA is unconstitutional because it violates the due process clause of the Fifth Amendment to the U.S. Constitution, which prohibits denying any person the equal protection of the law.
The ruling means that same-sex couples who are married under state law will be treated as married for the purpose of many federal laws that had been interpreted to apply only to opposite-sex couples.
The following Q&A sheds light on how the decision will affect income tax and estate planning issues, as well as employee benefit plans, leave policies, and other opportunities that companies give married workers. This Q&A is current as of August 15, 2013.
How does a national employer with a self-funded health plan handle health and welfare benefits for an employee with a same-sex spouse when the couple moves from a state that honors same-sex marriage to a state that does not?
We do not believe that a national employer with an ERISA plan would be subject to state marital law for health and welfare benefit plan purposes. As a result, the employer should not be legally required to offer benefits to same-sex spouses in any state, and the decision to offer such coverage remains solely at the employer’s discretion. If the employer extends eligibility or coverage to the same-sex spouses of eligible employees, it should amend its plan document and summary plan description accordingly.
The employer may want to initiate a communication plan, incident to plan enrollment, or open enrollment, to clearly define its plan coverage and eligibility, change in status provisions, and process or documentation requirements. We expect the Internal Revenue Service to clarify tax treatment for these situations.
What should an employer do now if it is based in a state that does not recognize same-sex marriage?
The employer may continue its current practices. We would suggest that such employers watch for guidance to see what, if any, changes will need to be made.
Does the DOMA decision provide a "qualifying event" for COBRA purposes?
No, the DOMA decision has not changed the types of events that are considered to be COBRA qualifying events.
FAMILY MEDICAL LEAVE ACT
How are "husband" and "wife" defined for FMLA purposes?
The FMLA defines "spouse" as "husband or wife, as the case may be." The FMLA regulations state: "Spouse means 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 in States where it is recognized."
In response to the Windsor decision, the Department of Labor recently issued an updated FMLA fact sheet to revise the definition of "spouse" to mean "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." Please note that the DOL's FMLA "spouse" definition does not cover situations in which an employee in a same-sex marriage resides in a state that does not recognize same-sex marriage, but was married or works in a state that does recognize such marriages. If the DOL wishes to expand the "spouse" definition, it will be unable to do so through fact sheets or interpretive guidance, but instead must act through a public notice-and-comment rulemaking process.
Neither the FMLA itself nor the FMLA regulations define "husband" or "wife." The relevant definition of "husband" in the Merriam-Webster online dictionary is "a male partner in a marriage." The relevant definition of "wife" in the same dictionary is "a female partner in a marriage." Accordingly, a female same-sex married couple would consist of two wives, and a male same-sex married couple would consist of two husbands.
Unless and until state law in the state of residence permits it, it’s unlikely that same-sex couples can legally designate each other as "husband" and "wife." It is possible that as an administrative enforcement matter before any new rulemaking, the DOL will determine that for FMLA purposes, "husband" and "wife" simply mean "married partner," and that all FMLA benefits and obligations should be extended to same-sex couples who are considered married in their state of residence to the same extent they are extended to opposite-sex married couples in that state.
How is "state of residence" determined for FMLA purposes?
The answer depends on individual facts. When an employee resides year-round in one state and owns no real property anywhere else, the state in which the employee lives is the only state of residence. When the employee owns homes in more than one state, or lives part of the year in one state and part of the year in another, the answer is more complicated and less certain.
Because the definition of residency can differ depending on the state or legal context, some courts have stated that a standard dictionary definition rather than a legal dictionary definition is appropriate. One relevant definition of "residence" in the Merriam-Webster online dictionary is "the place where one actually lives as distinguished from one's domicile or a place of temporary sojourn." Applying that definition to FMLA leave requests would have the employer ask the employee where he or she is actually living at the time of the leave request, and applying that state’s marriage laws to determine whether the employee has a "spouse."
TAX AND ESTATE PLANNING
Should an employer who currently imputes income as a result of providing benefits to the same-sex spouse of employees immediately stop?
We expect the IRS to issue some guidance soon and certainly expect guidance before employers will be required to prepare W-2s for the year ending December 31, 2013. For now, we advise employers to watch for IRS guidance and not make any immediate changes to their payroll practices.
What same-sex couples will be able to file as "married" for federal income tax purposes?
We are anticipating IRS guidance to address this issue. For many individuals (e.g., same-sex couples married in a state that recognizes same-sex marriage and who continue to reside there) the answer is easy. In many other cases, however, this will be an evolving area of the law, and the IRS has many questions to answer.
Will same-sex couples owe more or less federal income tax if they are "married" for federal income tax purposes?
Every couple's situation is different, and the answer may change from year to year. Joint filing generally tends to favor married couples where one spouse has a high income and the other spouse has a low or no income. Such couples likely will owe less tax and may have refund opportunities for prior tax years. Married couples in which both spouses are equally high-earners likely will owe more tax, however.
When can we expect IRS guidance on whether, for estate and gift tax purposes, a same-sex couple will be deemed to be married based on the law of the "state of celebration" (the state in which they were married, whether or not the couple resides in a state that recognizes same-sex marriage)?
The IRS's website states that it is "reviewing the important June 26 Supreme Court decision on the Defense of Marriage Act" and that it will "move swiftly to provide revised guidance in the near future." While estate tax returns for decedents who have died after the Windsor decision will not be due until May 2014, because Section 3 of DOMA was declared unconstitutional, all estates involving transfers to a same-sex spouse (even for decedents who died before the Windsor decision) will be affected. Accordingly, while there is no way to know for certain, some practitioners have speculated that we will have IRS guidance in the next few months.
[IMGCAP(1)] Diane A. Thompson is a partner in Ballard Spahr LLP's Los Angeles office. She practices in the area of executive compensation for both public and private companies and nonprofit organizations. She can be reached at 424.204.4334 or email@example.com.
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