The United States Supreme Court recently heard arguments in United States v. Windsor, 133 S.Ct. 786 (2012), a case that turns on the constitutionality of a section of the federal Defense of Marriage Act (DOMA). The section of DOMA at issue defines marriage for the purpose of federal law, including federal tax and benefits law, as a legal union between one man and one woman. Specifically, the question before the Supreme Court is whether DOMA violates the equal protection rights of same-sex couples legally married under state law by treating those couples differently than opposite-sex couples for the purposes of federal law.
The factual background of Windsor involves a lesbian couple married legally in Canada. The couple then moved to New York, which recognized their marriage as valid under New York state law. Edith Windsor’s spouse subsequently died, leaving her a sizeable estate. However, because DOMA prohibited the IRS from recognizing her marriage, Ms. Windsor was denied the benefit of the unlimited marital deduction on property left to her by her spouse. As a result of this impact of DOMA, Ms. Windsor was forced to pay a federal tax bill of over $300,000 on the estate left to her by her late spouse. Had Ms. Windsor’s marriage been an opposite-sex marriage, she would have been required to pay no federal tax on the estate. Ms. Windsor then brought a lawsuit against the IRS, asserting that this differential treatment under DOMA violated the Equal Protection Clause of the United States Constitution. Both the district court and the United States Court of Appeals for the 2nd Circuit found that the section of DOMA at issue did, indeed, violate the Constitution. The Supreme Court subsequently agreed to hear the case.
Employers in states where same-sex marriage is recognized or who have employees whose same-sex marriage took place in a state where such marriages are recognized generally see the impact of DOMA in the tax treatment of healthcare insurance benefits that the employer provides for employees’ same-sex spouses. Because federal tax laws are covered within DOMA’s reach, same-sex spouses are not considered a spouse under federal tax laws. As a result of this, unless a same-sex spouse meets the IRS definition of "dependent," the imputed value of the healthcare insurance benefit provided to the same-sex spouse is taxed as additional employee income.
In addition to tax considerations for employers who are providing healthcare benefits to the same-sex spouses of their employees, employers have had to be concerned about the impact of DOMA on the tax treatment of spousal retirement benefits, on benefit contributions (pre-tax for opposite-sex spouses; after-tax for same-sex spouses), on COBRA eligibility for same-sex spouses, on FMLA leave rights, and on ERISA-controlled retirement plans. These concerns have forced many employers to find "workarounds" to lessen the impact of DOMA on their employees. These “workarounds” often involve greater costs and higher administrative burdens for the employer.
In fact, a number of employers joined together to file a “friend of the court” brief in the Windsor case. In their brief, these employers asked the Supreme Court to affirm the decision of the Court of Appeals finding DOMA unconstitutional. Among the employers joining in this brief were Amazon, Apple, CBS Corporation, eBay, Google, Microsoft, Morgan Stanley, Thomson Reuters, and the Walt Disney Company. In their brief, these employers assert that as a result of the operation of DOMA, they are forced to "craft the policies and structure systems that can record gross-up amounts, educate human resources, benefits, and payroll administrators, and manage the dual systems," all to deal with the differential treatment of their employees’ same-sex marriage. These employers made it clear that it is not in their business interest to be forced to treat their employees differently based on the nature of a particular employee’s marriage.
While making predictions regarding what the Supreme Court may do in a particular case, based on oral argument, is a risky proposition, there were some clear signs in the argument that took place in Windsor on March 27, 2013. Based on the questions and comments from the Justices during oral argument, it did appear that there were at least five justices who would be inclined to find DOMA unconstitutional. Justices Kagan, Ginsburg, Sotomayor, and Breyer seemed inclined to find DOMA unconstitutional because of its differential treatment of same-sex couples, while Justice Kennedy appeared concerned that DOMA was an unconstitutional intrusion by the Congress on a matter that had historically been a matter of state’s rights – marriage. It will be very interesting to see how these positions are articulated in any opinions coming from the Court.
The outcome of the case will undoubtedly affect employers that operate in states where same-sex marriage is legal and, perhaps, will have some broader impact. A decision from the Court is not expected until June. We will continue to monitor this matter and provide an update when the decision is issued.