The U.S. Supreme Court’s decision in United States v. Windsor, issued two weeks ago, held that a portion of the Defense of Marriage Act (DOMA) was unconstitutional. This decision will affect individuals, employers, and certain businesses. In this Legal News Alert, we provide an overview of the decision, and discuss its effects on:
There is still a fair amount of uncertainty about the effect of the decision. For example, we are waiting to hear what the IRS and Department of Labor will say about the decision’s effect on their respective areas of jurisdiction. Despite the uncertainty, individuals, employers, and businesses should be aware that there may be changes ahead for their tax planning, employee policies and benefit plans, and business strategies.
What is DOMA?
DOMA is a 1996 federal law that had two main parts:
(1) For purposes of applying federal laws, it defined “marriage” as a union between only a man and a woman, and defined “spouse” as only a person of the opposite-sex.
(2) It said that a state is not required to recognize a same-sex marriage entered into in another state. This was a departure from the typical “full faith and credit” rules which normally required a state to recognize a marriage if it was validly entered into in another state.
What did the decision do?
The Windsor decision held that the first part of DOMA — that marriage can only be between a man and a woman under federal law — was unconstitutional.
It did not, however, strike down the second part of DOMA. As a result, states that do not recognize same-sex marriages are still permitted to disregard same-sex marriages entered into in other states. The fact that this portion of DOMA still survives will present some challenges for couples that move from a state that recognizes their same-sex marriage to a state that does not, as discussed in some of the remaining portions of this newsletter.
How will the federal government respond to the decision?
That remains to be seen. For federal laws and regulations, the Obama administration and federal agencies operating under the executive branch have announced that they will move quickly to implement the implications of the Windsor decision to the fullest and most uniform extent possible.
At this point, we expect the agencies to at least revert to their pre-DOMA positions. For example, before the 1996 enactment of DOMA, the IRS generally defined the term “spouse” and “marriage” in accordance with state law. We expect the IRS to once again accept state law definitions of “spouse” and “marriage.” If so, same-sex couples in states that legally recognize their marriages may be considered “spouses” and “married” for federal income tax purposes. It is possible that the federal agencies may go beyond this and adopt a rule recognizing, for federal law purposes, any valid same-sex marriage, regardless of where the couple resides.
The Windsor decision itself limits its holding to “lawful marriages.” The majority of states do not recognize same-sex marriage (see the next question for a list of those states which allow same-sex marriages). A lawful marriage does not appear to include civil unions and registered domestic partnerships (or common law marriages in states where common law marriages are not recognized). It is not clear whether a couple who was legally married in a state is considered married when they move to a state that does not recognize the “marriage.”
Which states allow same-sex marriages?
The District of Columbia and the following 13 states issue marriage licenses to same-sex couples: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota (effective August 1, 2013), New Hampshire, New York, Rhode Island (effective August 1, 2013), Vermont, and Washington.
Illinois and New Jersey are currently considering legislative measures that would grant marital recognition to same-sex couples. There are also legal battles in states such as Pennsylvania, Illinois, and Michigan seeking to overturn the states’ bans on same-sex marriage. It is possible that within the year, more than half of the country’s population will live in a state that legally recognizes same-sex marriages.
As discussed above, states that fail to permit same-sex marriages, or even honor the validity of same-sex marriages originated in one of the states listed above, may continue to do so. Accordingly, at the state level and presumably at the federal level, a same-sex marriage is considered valid only if recognized by the state in which the couple resides. Whether the federal government will adopt a more expansive rule — one that, for federal law purposes, continues to recognize a same-sex marriage that was validly entered into at the time of marriage, no matter where the couple ultimately resides — remains to be seen.
Effect on Employer and Individual Taxes
What does the decision mean to employers?
The Internal Revenue Code excludes amounts that an employer pays toward medical, dental, and vision benefits for an employee and the employee’s spouse and dependents from the employee’s taxable income as a tax-free fringe benefit. Prior to the Windsor decision, employers that provide these benefits to employees’ “same-sex partners” (that is, partners who are not “spouses” as defined in DOMA) were required to include the fair market value of the benefits as taxable income to the employee, unless the partner otherwise qualifies as the employee’s “dependent” as defined for federal income tax purposes (generally, this is unlikely).
Employers are required to withhold FICA (Social Security and Medicare) taxes from their employees’ taxable FICA wages, including the value of the taxable benefits discussed above. Employers must also pay their share of FICA taxes, as well as Federal Unemployment Tax Act taxes.
We expect the Windsor decision to result in an exclusion from the employee’s taxable income of the value of employer-provided benefits for a non-dependent same-sex partner who is considered married to the employee for federal tax purposes. Presumably, the IRS will provide guidance to employers on how to make any appropriate adjustments in 2013 for reporting (Forms 941, 940, W-2s) and FICA and income tax withholding purposes. We expect some employers to begin to exclude such value; others will wait for IRS guidance before changing their current payroll practices.
With respect to 2010, 2011, and 2012, it may be possible for employers to claim a refund of their share of the FICA taxes paid (and for the FICA taxes withheld from an employee assuming the employee consents to his or her inclusion in the claim) on the value of the same-sex partner benefit coverage. Taxpayers generally must file FICA refund claims for 2010 by April 15, 2014. Therefore, we expect most employers to wait for IRS guidance before filing FICA tax refund claims. Obviously, if such guidance is not forthcoming in a timely manner, it will be necessary to file refund claims before the statute of limitations for doing so expires.
Employers may also consider issuing amended Form W-2s showing less taxable income, allowing employees to file amended returns, possibly claiming tax refunds.
What does the decision mean for legally married same-sex individual taxpayers?
When two individuals are considered married for federal tax purposes, filing a joint return may result in lower combined federal income taxes than if the couple was unmarried, particularly if one individual earns most or all of the income (generally the larger the income and/or the larger the disparity in income, the more savings). Filing a joint return, however, also may result in significantly higher combined federal income taxes (the so-called “marriage penalty”) than if the two individuals had remained single taxpayers, particularly if both individuals earn approximately the same amount of income (and, in general, the larger the incomes, the larger the marriage penalty). Note that married taxpayers, with limited exceptions, cannot choose to file as single taxpayers. Same-sex couples now considered married under applicable state law may actually see a significant increase in their combined federal income taxes and may be subject to retroactive IRS income tax assessments on audit (or if they choose to re-file their income tax returns for prior tax years).
Same-sex married couples should seek competent professional tax advice on whether they should (1) file amended income tax returns, and if so, what special disclosures need to be made, (2) provide their employer a new Form W-4 claiming married status and/or changing their number of exemptions/amount of income tax withholding, and (3) join their employer’s FICA tax refund claim if asked to do so, and if not, whether to pursue a FICA tax refund claim on their own. Same-sex married couples should seek such advice soon, particularly with respect to 2009 income tax returns that were filed in 2010 with a valid extension of time to file (as the statute of limitations will expire on October 15, 2013 at the latest).
Tax-Free Employer Health Coverage
When two individuals are considered married for federal tax purposes, one individual can receive certain benefits from the other’s employer tax-free. The most common examples are health care coverage and tax-free reimbursements from flexible spending account (FSA) plans. Prior to the Windsor decision, employers that provide these benefits to employees’ “same-sex partners” (that is, partners who were not considered “spouses” under DOMA) were required to include the fair market value of the benefits as taxable income to the employee, unless the partner otherwise qualifies as the employee’s “dependent” as defined for federal income tax purposes (generally, this is unlikely). Employees also may be able to file amended returns (even without an amended Form W-2) with proper disclosures. Again, same-sex married couples should seek competent professional tax advice.
When two individuals are considered married for federal tax purposes, they can also be considered divorced. Certain court-ordered payments to a spouse or ex-spouse can qualify as deductible alimony. A transfer of property incident to a divorce is also generally considered a tax-free gift rather than a taxable transaction. In contrast, transfers between unmarried individuals are generally not deductible, and they may be treated as either a taxable transaction or a gift, and if a gift, maybe subject to gift taxes or loss of estate/gift tax exemption amounts.
Individual Retirement Account (IRA) and Qualified Retirement Plans
When two individuals are considered married for federal tax purposes and one individual dies, the survivor can roll over IRA and qualified retirement plan balances inherited from the decedent into the survivor’s own IRA. The survivor can then delay taking annual required minimum distributions (RMDs) from the rollover IRA until after he or she turns 70½. In contrast, when a non-spouse inherits an IRA or a qualified retirement plan balance, he or she may have to start taking RMDs sooner and in larger amounts, resulting in less tax deferral benefits. Additional information about the effect of the decision on gift and estate taxes and employee benefit plans is included below.
There are many other provisions in the Internal Revenue Code that may apply, some beneficial, such as the availability of the innocent spouse protections, and some detrimental, such as the related-party rules that disallow losses on transactions between two individuals considered married for federal income tax purposes.
Effect on Gift and Estate Taxes
How does the decision affect a same-sex couple’s ability to make use of the federal estate tax provisions available to married couples?
As a result of the decision, same-sex couples that are legally married in their state of residence are now able to take advantage of various tax benefits available to spouses for purposes of the federal gift and estate tax. The federal estate tax is imposed at an individual’s death on the transfer of assets that exceed the decedent’s available estate tax exemption (for 2013, each individual has an estate tax exemption amount of $5.25 million). With proper estate planning, a married couple can make use of two exemptions, allowing the transfer of up to $10.5 million without any estate tax.
As a general matter, all assets that pass to a surviving spouse or certain trusts for the benefit of a surviving spouse qualify for an unlimited marital deduction for estate tax purposes. This allows a married couple to defer all estate tax until the surviving spouse’s death (rather than estate tax being due at the first death). The Windsor decision expands the definition of spouse to include the survivor of a same-sex couple where the couple was legally married in their state of residence.
The decision also allows legally married same-sex couples to make use of the estate tax portability provisions. When a spouse dies without making full use of his or her estate tax exemption, the surviving spouse has the ability (subject to certain restrictions) to add the deceased spouse’s unused exemption to the surviving spouse’s exemption at the time of the surviving spouse’s death.
How does the decision affect a same-sex couple’s existing estate planning documents?
For same-sex couples that are legally married in their state of residence, it is important to review existing estate planning documents (e.g., wills, revocable trusts). It is likely that current estate planning documents will not make full use of the tax advantages available to married couples.
As discussed above, it is important to keep in mind that the Windsor decision invalidated only one provision of DOMA. A second provision of DOMA gives individual states the option not to recognize same-sex marriages that are legal in other states. If a same-sex couple is legally married in a state that recognizes same-sex marriage but then moves to another state that does not recognize same-sex marriage, the couple will need to re-evaluate their estate plans. As a matter of state law, their marriage may no longer be recognized. This may cause them to lose some of the tax advantages discussed above, which may necessitate a restructuring of the estate plan.
What lifetime gifting arrangements are now available to legally married same-sex couples as a result of the Windsor decision?
While the federal estate tax imposes a tax on the transfer of assets at an individual’s death, the federal gift tax imposes a tax on the transfer of assets during a person’s lifetime. In 2013, each individual has a lifetime gift tax exemption of $5.25 million. Any lifetime gifts that use an individual’s gift tax exemption will reduce the amount of the estate tax exemption available at the individual’s death.
As with the estate tax, the gift tax also includes an unlimited marital deduction for gifts made to a spouse, either directly or into certain trusts, which allows for the tax-free transfer of assets between spouses. Legally married same-sex couples can now make unlimited transfers to one another without being subject to gift tax. If one spouse has significantly more assets than the other, same-sex couples can now equalize their estates with lifetime asset transfers to ensure that both individuals have sufficient assets to use their respective estate tax exemptions at death. Previously, larger transfers between same-sex couples could potentially trigger gift tax consequences, which complicated household budgeting if paychecks were deposited into joint bank accounts or if one spouse earned more income and paid the bulk of the household expenses.
Additionally, same-sex couples that are legally married can now make a “gift-splitting” election that is available only to spouses on their annual gift tax returns. The gift tax authorizes tax-free gifts up to the “annual exclusion amount” (for 2013, this amount is $14,000 per donor, per recipient). By gift-splitting, gifts made by one spouse can be treated as being made one-half by each spouse. This allows married couples to take advantage of each spouse’s separate annual exclusion amount, effectively allowing a married couple to give up to $28,000 per recipient, per year without incurring gift tax.
Are there retirement account tax advantages available to same-sex couples as a result of the decision?
Certain retirement account income tax advantages are available only to a surviving spouse who is the designated beneficiary on a decedent’s retirement accounts. A surviving spouse — and no one else — has the unique option to roll over the deceased spouse’s retirement accounts into the surviving spouse’s own name and postpone required minimum distributions until the year after the surviving spouse attains age 70½. In many cases, this allows longer deferral of income tax recognition for withdrawals from traditional IRAs or other tax-deferred retirement accounts.
Does the decision have any effect on capital gains paid by same-sex couples?
For legally married same-sex couples that live in community property states that recognize same-sex marriage (as of the time of this writing, these states are California and Washington), assets held by the couple will qualify for a “double step-up” in basis at the time of the first spouse’s death.
In community property states, each spouse is treated as owning one-half of all community property assets of the married couple, regardless of how the assets are titled. Therefore, when one spouse dies, one-half of the assets is treated as being owned by the deceased spouse, and one-half is treated as being owned by the surviving spouse.
Under the Internal Revenue Code, the basis of assets owned by a decedent is adjusted to the value of the assets on the decedent’s date of death. This effectively eliminates any pre-death capital gains attributable to the asset’s appreciation in value from the time of acquisition through the date of death.
The Internal Revenue Code gives special treatment to community property assets, allowing a “double step-up” in basis of community property assets owned by spouses. Not only does the deceased spouse’s share of the community property assets receive a step-up in basis, but the surviving spouse’s share of the assets also gets stepped-up. For many couples, this can result in substantial savings on capital gains taxes if assets have significantly appreciated in value. As a result of the Windsor decision, this tax advantage will now be available to legally married same-sex couples in community property states.
Effect on Employer Policies
What effect does the decision have on employers and their employment-related policies?
Any federal benefits and laws that apply to an employee’s spouse will now extend to same-sex spouses in legally recognized marriages. There are more than 1,100 federal laws and regulations that apply to married couples. Employers will need to review their employment policies, particularly as they relate to family and medical leave, recognition of bi-national same-sex marital relationships, taxes and employee salary, and employee benefits. While the Supreme Court's decision in Windsor is certain to affect employers in states such as New York and Massachusetts, where same-sex marriage is legal, the implications for employers in states like Illinois, Florida, or Wisconsin is less certain. Still, in light of Windsor and the rapidly changing legal landscape for LGBT couples, it is strongly encouraged that employers review their policies and benefits packages to ensure they are in compliance with applicable state and federal law.
As a starting point, employers may wish to survey their workforce, to find out if any employees have been married in states that recognize same-sex marriage. For reasons discussed below, employers also may wish to find out if any employees have entered into a civil union or registered domestic partnership.
What kind of changes should employers expect to make in light of the Windsor decision?
Most immediately, employers should make changes and updates to any family and medical leave benefits, welfare benefits they offer employees who are married, as well as qualified retirement plans. (See the discussion under Effect on Employee Benefit Plans below for more information.)
Employers should discuss required changes with employment and benefits counsel, and implement any recommended changes quickly. Additionally, because the Windsor decision does not extend to couples in civil unions or domestic partnerships, employers should make an effort to determine which of its LGBT employees are in valid marriages and which are in another form of recognized union.
When does the Windsor decision go into effect?
Immediately. Justice Kennedy, writing the opinion, did not indicate that there was a deadline by which employers or federal agencies were required to abide by its implications, which, in essence, means that employers are required to comply with federal law immediately. Furthermore, because DOMA was found unconstitutional, it is arguable that the law, when passed in 1996, was never constitutional to begin with. Therefore, it is possible that employers never had a right to restrict federally mandated rights and benefits to heterosexual employees without also providing such benefits to validly married same-sex couples. Employers who provided equal rights and benefits to employees prior to the Windsor decision may be insulated from claims by employees in same-sex marriages, while employers who have yet to offer such benefits may risk claims for past benefits due. Employers should consult counsel to determine whether they are at risk of possible claims by employees in same-sex marriages denied equal benefits and rights prior to the Windsor decision.
I am an employer in a state that recognizes same-sex marriage. Do I need to do anything to comply with the Windsor decision?
Yes, there are a number of federal laws and regulations that will now apply to employees who have a valid same-sex marriage. Many of these issues are addressed in greater detail below. As an employer with employees in valid same-sex relationships, you are now required to comply with all applicable federal employment mandates, including family and medical leave, retirement benefits, recognition of bi-national same-sex marital relationships, and other such benefits. If your policies do not already provide equal benefits for your employees in valid same-sex marriages, you will need to comply with applicable laws and regulations quickly.
I have employees in a state that recognizes civil unions or domestic partnerships between persons of the same-sex, but not marriages. Does the Windsor decision require that I take any action?
This is a difficult question that is still being resolved, but the speed with which you enact any changes will depend on whether you employ a worker that has a valid marriage performed elsewhere. While employees who are in civil unions or domestic partnerships (or some other form of recognized relationship that is not marriage) are not affected by the Windsor decision, there are some states in which a marriage performed elsewhere will be recognized even if the state itself does not issue marriage licenses to same-sex couples, such as New Mexico. Still other states will recognize marriages performed elsewhere as a civil union, rather than a marriage, such as Illinois. For any applicable state laws, the state in which the employee works for you will likely determine whether state benefits are available to non-married couples in some other form of same-sex union.
For federal laws and regulations, the Obama administration and federal agencies operating under the executive branch have announced that they will move quickly to implement the implications of the Windsor decision to the fullest and most uniform extent possible. We expect that this may mean that even if the state in which an employer operates does not recognize same-sex marriages, employees in a valid same-sex marriage performed elsewhere are entitled to most rights and benefits of their heterosexual counterparts, and employers will be required to provide at least some applicable federal benefits. As described in more detail below, this includes certain family and medical leave, health benefits, marital recognition for bi-national same-sex couples, and certain retirement benefits. On the other hand, if you have no employees with valid same-sex marriages, you will not be required to treat other forms of same-sex relationships the same as marriage. Still, it is advisable that employers update policies accordingly to treat heterosexual and LGBT employees on equal footing, to the extent possible under the law of your state, as there will likely be additional regulatory changes and litigation leading to equalization of relationship status recognition at the state and federal levels in the relatively near future.
I employ employees in a state that does not provide any type of same-sex relationship recognition, such as civil unions, domestic partnership, or marriage. Do I need to do anything to comply with the Windsor decision?
If you have employees who entered into valid same-sex marriages in another state or country, you may be required to make some changes to your policies. Although at this point in time it is unclear how far-reaching the Windsor decision is, the Obama administration and federal agencies operating under the direction of the executive branch have almost uniformly indicated that they will implement the effects of the decision swiftly and uniformly to the greatest extent possible. We expect employers operating in states that do not legally recognize any form of same-sex union will need to update at least some policies and practices as they relate to federally mandated rights and benefits. The most important of these changes is to employer-provided health insurance benefits, retirement plans, and family and medical leave. Employers in such states should consult counsel to discuss which policies and benefits will require changes in light of Windsor.
I am an employer with operations and employees in multiple states, some of which permit same-sex marriages, others of which do not. How does the Windsor decision affect me?
The implications of Windsor are immediate with respect to any federally mandated employee benefits and policies in states that recognize same-sex marriages. For companies operating in multiple states with varying laws, but with operations in at least one state that recognizes same-sex marriage, implementation of uniform policies and benefits across the company, to the extent possible, is encouraged. Thus, you may wish to offer any leave, immigration, or other employee benefits to LGBT employees in valid same-sex marriages on equal terms with those in opposite-sex marriages. As more states allow same-sex marriages, more employees will be eligible for benefits under federal law, so uniform policies nationwide may be best, not only for convenience but also for if, and when, a certain state’s law may change that will provide employees there with greater benefits under federal law. Employers with operations in multiple states should consult employment counsel to ensure compliance with Windsor, particularly as it relates to employer-provided employee benefit plans.
What about the Employment Non-Discrimination Act (ENDA) currently pending in Congress? Does Windsor change anything?
ENDA is the proposed federal legislation explicitly prohibiting discrimination in employment on the basis of sexual orientation and gender identity. While various versions of the legislation have been floated in Congress since 2007, ENDA has not yet become law. Windsor likely has no effect ahead of ENDA’s passage except in the provision of federally mandated rights and benefits for employees in same-sex marriages. However, the legislation has recently seen new signs of life in Congress, and many states and local governments have taken action on their own to pass laws prohibiting employment discrimination on the basis of sexual orientation (and, in some cases, gender identity). In conjunction with updating existing policies and practices post-Windsor, employers would be wise to also update any equal employment opportunity (EEO) statements or policies — including no-harassment and anti-retaliation policies — to include sexual orientation and gender identity. Furthermore, employers operating in multiple states would be advised to make uniform their EEO, no-harassment, and anti-retaliation policies to be inclusive of sexual orientation and gender identity to ensure all employees are treated equally, no matter where they live or work.
What types of leave am I now required to provide my employees in same-sex marriages?
Employees in same-sex marriages are now entitled to equal leave benefits under the Family and Medical Leave Act (FMLA) — but only if the state in which the couple resides recognizes the marriage. Prior to DOMA’s enactment, the Department of Labor issued a rule stating that a “spouse,” for purposes of FMLA leave, means “a husband or wife as defined or recognized under State law for purposes of marriage in the State where the employee resides.” 29 C.F.R. Sec. 825.102. While DOMA previously superseded this rule, post-Windsor the rule is once again in effect. Thus, FMLA policies maintained by an employer must now permit an LGBT employee with a seriously ill spouse to take the same leave that is required for heterosexual employees if that employee resides in a state that recognizes same-sex marriages (e.g., New York or California) or gives validity to marriages performed in other states (e.g., New Mexico). To the extent you have employees residing in states that recognize same-sex marriages (even if you do not operate in such a state) and your current FMLA policy does not already permit equal leave for those employees, you should update such policies immediately. It is also recommended that you do not differentiate between employees who are married, and those who are in some other form of recognized union (civil unions or domestic partnerships).
It is also important for employers to remember that the Department of Labor defines “son or daughter” for purposes of qualifying FMLA leave as any child that an employee intends to share in parenting with his or her same-sex partner, including a biological or adopted child. This is true even if that child is not adopted by the employee seeking to exercise FMLA leave, since many same-sex couples do not engage in dual-parent adoption, either by law or by choice, and whether or not the couple is in a validly recognized marriage.
I have employees who are in bi-national same-sex marriages. What affect does Windsor have?
A bi-national same-sex couple is one in which one spouse is a U.S. citizen and one is from another country, but is not already a naturalized citizen. For the couple, this means that the non-citizen spouse will be recognized as the legal spouse of a U.S. citizen and is eligible for permanent residency and citizenship on this basis. It also means that such couples will be automatically included in any comprehensive immigration reform that may come out of U.S. Congress.
There is no immediate impact for employers. However, if an employer is required to conduct a re-verification of an employee’s work authorization at any time (the completion of a new Form I-9), it should be noted that a formerly non-citizen employee in a same-sex marriage with a U.S. citizen may present different documentation at the time of re-verification indicating permanent residency status or citizenship. Employers cannot use this information as a basis to discriminate against the employee, and should treat the employee in the same manner it would a non-citizen employee in an opposite-sex marriage who was married and later required to re-verify employment eligibility.
While re-verification is only required by the Department of Homeland Security under limited circumstances, employees wishing to update their own employment authorization verification to reflect any change in residency or citizenship status may do so at any time. However, outside of these circumstances, employers should not request or require any employees in bi-national same-sex marriages to do so.
Effect on Employee Benefit Plans
What effect will the decision have on qualified retirement plans (401(k), pension and 403(b))?
All spousal rights under those plans will now apply to same-sex spouses. For example, if a participant in a 401(k) plan filed a beneficiary designation form naming his children as his beneficiaries, and did not get his same-sex spouse’s consent to that beneficiary designation because it previously was not required under federal law, then the beneficiary designation form is now ineffective due to the absence of the spouse’s consent. As another example, if a participant in a pension plan dies prior to his annuity starting date, then that participant’s same-sex spouse would be entitled to the preretirement surviving spouse’s benefit under the plan.
Because neither ERISA nor the Internal Revenue Code defines who is considered a “spouse,” until we receive guidance from the IRS and DOL, we believe that qualified retirement plans should adopt a “state of residence rule.” Under the “state of residence rule,” whether an individual is married is determined based on their state of residence. As a reminder, many states do not recognize same-sex marriages, even if they were validly entered into in those states that allow them. So, for example, an employee who was validly married to a same-sex spouse in Maryland, would not be considered married if she moves to Wisconsin.
Can an employer amend its qualified retirement plans to limit spousal rights to opposite-sex spouses only?
Generally not. Many spousal rights under qualified retirement plans are mandated by federal law. Now that same-sex spouses are recognized under federal law, they must also be recognized as spouses under an employer’s retirement plans when those federally mandated rights apply. If an employer’s retirement plans provide spousal rights or benefits above and beyond what the federal law requires, the employer could amend the plan to limit those rights to opposite-sex spouses only.
What effect will the decision have on an employer’s welfare plans?
It depends on how “spouse” is defined in those plans. Unlike qualified retirement plans, federal law does not mandate that employers cover spouses under their welfare plans. Accordingly, if an employer’s welfare plans define a “spouse” to mean an opposite-sex spouse only, then the decision has no effect on such plans. On the other hand, if an employer’s welfare plans do not have such a definition, then the result is that same-sex spouses are now afforded the same rights under such welfare plans as are opposite-sex spouses.
If an employer already allows same-sex spouses to participate in its health plans, but have been reporting and tax the value of such coverage as compensation, can the employer stop taxing coverage now?
Yes. While some employers may wish to wait until IRS guidance is issued, an employer can stop reporting the value of the same-sex spouse’s coverage as compensation to the employee. When the employer issues the Form W-2 for 2013, it does not have to report any additional compensation related to the health plan coverage for the entire year. As a result, the employer probably will have over-withheld taxes on the employee’s wages to date, but the employee should be able to get a credit for that when they file their 2013 tax return.
Is the decision considered a “change in status” event or HIPAA special enrollment event allowing employees with same-sex spouses to make election changes under an employer’s welfare plans?
No. We do not believe the decision — which recognizes same-sex marriages under federal law — is considered a change in status event or a HIPAA special enrollment event. The IRS may provide guidance about that soon. If an employee gets married to a same-sex spouse in the future, however, that would be considered a HIPAA special enrollment event and a change in status event for which changes in coverage elections could be made.
Does the decision have an effect on medical flexible spending accounts (FSA)?
Yes. The same-sex spouse’s unreimbursed medical expenses can now be submitted for reimbursement to the employee’s FSA. Medical expenses incurred during the current plan year would be eligible for reimbursement. As discussed above, because the decision is not a “change in status” event, an employee should not be permitted to increase his or her contributions to the flexible spending account to account for the same-sex spouse’s expenses, absent IRS guidance to the contrary.
What effect will the decision have on an employer’s non-qualified plans?
It depends on how “spouse” is defined in those plans, if at all. If the plan defines as a “spouse” as an opposite-sex spouse only, then the decision have no effect on such plan. However, if the plan does not have a definition of “spouse,” then the employer will need to decide how to interpret that term or amend the plan to make it clear. Unlike qualified retirement plans, nonqualified plans are not mandated by law to provide spousal rights. So, it is up to the employer to determine which spouses it wishes to provide rights to under the plan.
Does the decision affect non-married same-sex domestic partners?
No, the decision has no effect on unmarried, same-sex domestic partners. The issues with respect to providing benefits to such partners remain the same as before.
Effect on Health Care Providers
How does the decision affect health care providers?
While the decision affects insurance and tax issues associated with health care (discussed above), the decision does not create any additional duties for health care providers. Since many private health care providers have covered same-sex couples for many years, providers should handle coverage for partners of federal employees or families who are covered by any federally funded health insurance programs in the same manner and rely upon the insurance information provided by patients. It also should be noted that topics such as medical power of attorney and other issues related to decisions regarding patient care continue to be governed under state law and were not altered by the DOMA decision.
How will the decision effect health care reform?
By making insurance more affordable and readily available for same-sex spouses, the number of individuals seeking to access coverage under the health care exchanges (scheduled to go into effect in 2014) may decrease. In addition, there may be a slight reduction in Medicare and Medicaid spending since married, same-sex couples' eligibility will be evaluated based upon their joint income level.
Effect on Insurance Companies
What effect does the decision have on insurance companies?
Because insurance is generally regulated on a state-by-state, rather than federal, basis, insurers in states which already permit same-sex marriage are generally already obligated to treat same-sex and opposite-sex couples equally. However, because of the change in federal tax treatment of married same-sex couples which results from the Windsor decision, insurers now have a great opportunity to reach out to the LGBT market with tax-advantaged life insurance and annuity products. Windsor allows married same-sex couples to take advantage of the exemption from estate taxation for married couples under federal tax law; as a result, insurance products with death benefits — predominately life insurance and annuities — are now substantially more attractive to same-sex couples who are legally married because the vast majority of life insurance and annuity death benefits can be received by the surviving spouse tax-free. As a result, life insurers should ensure that their agents are aware that Windsor may dramatically impact the financial planning needs of same-sex couples, including the advisability of life insurance and annuities. Both agents and life insurers will need to incorporate the new tax treatment of married same-sex couples in life insurance and annuity suitability recommendations as well as sales and promotional materials.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss the topic further, please contact your Foley attorney or the following:
Carl D. Fortner
William R. Hughes
Katherine L. Kraschel
John L. Litchfield
Jack S. Lord, Jr.
Leigh C. Riley
Morgan J. Tilleman