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UPDATE: DOMA—IRS & Department of Labor Issue Guidance

Posted on Wed, Oct 02, 2013 @ 10:21 AM

Jack B. HarrisonBy Jack B. Harrison

On June 26, 2013, the Supreme Court issued its long-awaited decision in Windsor v. United States, No. 12-307, a case challenging the section of the Defense of Marriage Act (DOMA) under which same-sex marriages validly entered into under applicable state law were not recognized for the purposes of federal laws.  The Court ruled, in a 5-4 decision, that this section of DOMA is unconstitutional.  The Supreme Court first determined that those defending the law, representatives of the United States Congress, actually had standing to defend the law, this giving the Supreme Court jurisdiction to hear the case.  The majority, with Justice Kennedy writing for the Court, held that the equal protection clause of the Fourteenth Amendment prohibited the federal government from refusing to recognize same-sex marriages that have been entered into validly under the law of a state.  A primary basis for this decision was that states have historically defined the parameters for those marriages they consider valid.  In this specific case, since New York had chosen to protect same-sex relationships by allowing same-sex couples to marry, it was a violation of equal protection for the federal government to make unequal a subset of state-sanctioned marriages.

On September 18, 2013, the Department of Labor (“DOL”) released Technical Release No. 2013-04 in order to provide guidance to employee benefit plans regarding the definition of "spouse" and "marriage" under ERISA in light of the Supreme Court's decision in Windsor.  The Internal Revenue Service (”IRS”) previously issued identical guidance to taxpayers in Revenue Ruling 2013-17.

The guidance issued by both the DOL and the IRS provides the following:

  1. "Spouse" refers to any individuals who are lawfully married under any state law, including individuals married to a person of the same sex.
  2. "Marriage" includes a same-sex marriage that is legally recognized as a marriage under any state law.
  3. Marriages between same-sex individuals that were validly entered into in a state whose laws authorize the marriage of two individuals of the same sex will be recognized even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.
  4. "Spouse" and "marriage" do not include individuals in a formal relationship recognized by a state that is not called a marriage under state law, such as domestic partnerships and civil unions.

Under the DOL analysis, the state of celebration rule, recognizing marriages that are valid in the state in which they were celebrated, regardless of the married couple’s state of domicile, provides for uniformity.  The DOL reasoned that the application of this rule provides a uniform rule of recognition that can be applied by employers, plan administrators, participants and beneficiaries.  According to the DOL, to adopt a rule based on the state of domicile, as opposed to the state of celebration, would create much confusion for employers who operate or have employees (or former employees) in more than one state or whose employees move to another state while entitled to benefits.  The net effect of the adoption of such a rule, according to the DOL would be a substantial burden on employers, both financial and administrative.

While the DOL release does not provide an effective date or indicate whether this new guidance will apply retroactively, the DOL does make it clear that it will offer further guidance dealing with specific benefit plan issues under ERISA.

Given these continuing developments in the aftermath of the Windsor decision, prudent employers and other plan sponsors should take the following steps, in consultation with their benefits counsel and plan administrators:

  • Send appropriate communications to employees about how the Windsor decision potentially impacts their benefits, describing what changes are being made to the benefit plans or policies in light of the decision;
  • Review benefit plans and employee policies to determine the impact of Windsor, if any, on their plans and policies;
  • Determine whether current plan eligibility rules, definitions and policies, specifically as related to the definition of spouse, need to be revised in light of Windsor and then revise applicable documents and forms, as necessary;
  • Where the employer provides domestic partner/civil union partner health benefits, consider whether those benefits should be continued or revised, given that same-sex spouses will be recognized as spouses for purposes of federal law, considering carefully applicable state law requirements and risks; and
  • Ensure that outside administrators, insurers and service providers are administering plans in a manner consistent with the employer's intent and the applicable legal requirements, including with respect to payroll and tax issues, in light of the decision in Windsor.

Tags: DOMA, Defense of Marriage Act

UPDATE: DOMA Impact on Employer Benefit Plans - Q&A

Posted on Thu, Aug 01, 2013 @ 09:17 AM

Jack B. Harrisonby Jack B. Harrison

On June 26, 2013, the Supreme Court issued its long-awaited decision in Windsor v. United States, No. 12-307, a case challenging the section of the Defense of Marriage Act (DOMA) under which same-sex marriages validly entered into under applicable state law were not recognized for the purposes of federal laws.  The Court ruled, in a 5-4 decision, that this section of DOMA is unconstitutional.  The Supreme Court first determined that those defending the law, representatives of the United States Congress, actually had standing to defend the law, this giving the Supreme Court jurisdiction to hear the case.  The majority, with Justice Kennedy writing for the Court, held that the equal protection clause of the Fourteenth Amendment prohibited the federal government from refusing to recognize same-sex marriages that have been entered into validly under the law of a state.  A primary basis for this decision was that states have historically defined the parameters for those marriages they consider valid.  In this specific case, since New York had chosen to protect same-sex relationships by allowing same-sex couples to marry, it was a violation of equal protection for the federal government to make unequal a subset of state-sanctioned marriages.

While the holding in Windsor will have an immediate impact on benefits, as well as the tax treatment of those benefits, the federal government has yet to provide guidance as to whether and when the ruling may be applied retroactively by the government.  It is certainly likely that the ruling will be applied retroactively, at least in some circumstances, such as allowing couples in valid same-sex marriages and their employers the opportunity to amend prior-year tax returns to seek refunds of taxes paid on imputed income resulting from health plan coverage for same-sex spouses.

It is likely that the Windsor decision will impact the design and operation of private employer benefit plans, including 401(k) plans and other retirement plans, governed by ERISA, health benefit plans, and leave policies.  At this immediate time, the specific impact on benefit plans remains unclear.  It is likely that the IRS will issue some guidance regarding the impact of this decision.  However, the Windsor decision raises questions that will need to be considered by employers as the federal government and employers adjust to the various definitions of marriage in state and federal law.  Employers must consider these emerging issues in light of their own specific benefit plans and business needs.  Employers should be in consultation with their benefits counsel to determine what approach may be best suited to their specific needs.

What Same-Sex Marriages Will The Federal Government Recognize After Windsor?

Under Windsor, the federal government is to look to state law to determine whether or not a same-sex couple is validly married.  One question that Windsor left open is which state law the federal government is to follow: the law of the state in which the marriage occurred (state of celebration) or the law of the state in which the couple currently resides (state of residence).  This question is critical for same-sex couples and for employers, given that the majority of states currently do not recognize same-sex marriages.  For federal purposes, it appears likely that under Windsor, the federal government will recognize the same-sex marriages of couples residing in states that allow same-sex marriages.  However, it is less clear at the moment how the federal government may treat married same-sex couples residing in other states.

What States Currently Allow Same-Sex Couples To Be Married?

California, Connecticut, Delaware, Iowa, Maryland, Massachusetts, Maine, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, and the District of Columbia allow same-sex couples to be married.  In most cases, states that allow same-sex couples to marry recognize valid same-sex marriages from other states and foreign countries, such as Canada.

Does Windsor Impact Health Plans Already Providing Benefits To Same-Sex Spouses Of Employees Residing In A State That Recognizes Same-Sex Marriages?

Prior to Windsor, the IRS treated the value of employer-provided health coverage to an employee’s same-sex spouse as wages or imputed income to the employee, thus subject to federal income and employment taxes.  After Windsor, where an employer provides health care coverage to a non-employee same-sex spouse in a state that recognizes same-sex marriage, that coverage will be tax-free to employees, without any showing of tax dependency.  Also, after Windsor, other federal rights historically provided to spouses in health plans, such as independent rights to COBRA continuation coverage and certain HIPAA special enrollment rights, will now also be available to same-sex spouses in states that recognize same-sex marriage.

Does Windsor Impact Health Plans In States That Do Not Recognize Same-Sex Marriage?

Windsor only requires that the federal government recognize same-sex marriages for the purpose of federal benefits, not that state governments recognize them.  Therefore, it is unclear what impact the decision may have on employer health plans in states that do not recognize same-sex marriages.  Where an employer in a state that does not recognize same-sex marriages elects not to provide health coverage to same-sex spouses under its health plan, Windsor will likely have no effect on the employer’s health plan.  Where an employer in a state that does not recognize same-sex marriages elects to provide coverage to same-sex spouses, it is likely that the IRS will issue guidance on whether the rules and rights for those same-sex spouses residing in states that recognize same-sex marriages, such as tax-free coverage and COBRA continuation coverage, will extend to same-sex spouses who entered into valid marriages in another state, but now reside in a state that does not recognize such marriages.  It is likely that the IRS will extend these rules in this manner.

What Impact Does The Ruling In Windsor Have On Employees And Their Same-Sex Partners Who Are In A Domestic Partner Or Civil Union Relationship, But Not In A Valid Marriage?

While Windsor specifically states that the “opinion and holding are confined to those lawful marriages,” it is possible that the decision will have an impact on domestic partner treatment.  For example, the IRS previously determined that an opposite-sex couple in a civil union in Illinois could file a joint income tax return as a married couple, even though they were not married under Illinois state law.  This determination by the IRS was predicated on the fact that, under Illinois law, individuals who were in valid civil unions were granted the same rights and responsibilities as married couples in Illinois.  Several states (Illinois, Colorado, New Jersey, Oregon, Hawaii and Nevada) have domestic partnership or civil union laws similar to the Illinois civil union law, granting registered domestic partners or those in civil unions all of the rights and privileges of married couples, while not allowing “married” nomenclature.

Is There Any Federal Law Requiring An Employer To Provide Health Plan Coverage To Spouses, Whether Or Not The Married Couple Is Opposite-Sex Or Same-Sex?

No federal law requires employers to provide health coverage to the spouses (opposite-sex or same-sex) of employees.  Currently, federal law allows an employer to have a health plan that provides coverage only to employees or only to employees and their children.  Under the Affordable Care Act, it seems likely that penalties will not be imposed on employers if they elect not to provide coverage to spouses.  However, a penalty could, in fact, be imposed under the Affordable Care Act on the employee’s spouse if he or she does not have health coverage from some source.

While Waiting For The Federal Agencies To Give Guidance On Windsor, Are There Any Steps Employers Should Immediately Take Regarding Their Benefits And Benefit Plans?

In the immediate aftermath of the Windsor decision, prudent employers and other plan sponsors should take the following steps:

  • Send appropriate communications to employees about how the Windsor decision potentially impacts their benefits, describing what changes are being made to the benefit plans or policies in light of the decision;
  • Review benefit plans and employee policies to determine the impact of Windsor, if any, on their plans and policies;
  • Determine whether current plan eligibility rules, definitions and policies, specifically as related to the definition of spouse, need to be revised in light of Windsor and then revise applicable documents and forms, as necessary;
  • Where the employer provides domestic partner/civil union partner health benefits, consider whether those benefits should be continued or revised, given that same-sex spouses will be recognized as spouses for purposes of federal law, considering carefully applicable state law requirements and risks; and
  • Ensure that outside administrators, insurers and service providers are administering plans in a manner consistent with the employer's intent and the applicable legal requirements, including with respect to payroll and tax issues, in light of the decision in Windsor.

Tags: DOMA, Defense of Marriage Act, Employer Benefit Plans

Recent Decision on DOMA Potentially Impacts Employer Benefit Plans

Posted on Mon, Jul 15, 2013 @ 09:15 AM

Jack B. Harrisonby Jack B. Harrison

On June 26, 2013, the Supreme Court issued its long-awaited decision in Windsor v. United States, No. 12-307, a case challenging the section of the Defense of Marriage Act (DOMA) under which same-sex marriages validly entered into under applicable state law were not recognized for the purposes of federal laws.  The Court ruled, in a 5-4 decision, that this section of DOMA is unconstitutional.  The Supreme Court first determined that those defending the law, representatives of the United States Congress, actually had standing to defend the law, this giving the Supreme Court jurisdiction to hear the case.  The majority, with Justice Kennedy writing for the Court, held that the equal protection clause of the Fourteenth Amendment prohibited the federal government from refusing to recognize same-sex marriages that have been entered into validly under the law of a state.  A primary basis for this decision was that states have historically defined the parameters for those marriages they consider valid.  In this specific case, since New York had chosen to protect same-sex relationships by allowing same-sex couples to marry, it was a violation of equal protection for the federal government to make unequal a subset of state-sanctioned marriages.

It is likely that the Windsor decision will impact the design and operation of private employer benefit plans, including 401(k) plans and other retirement plans, governed by ERISA, health benefit plans, and leave policies.  At this immediate time, the specific impact on benefit plans remains unclear.  It is likely that the IRS will issue some guidance regarding the impact of this decision.  However, the Windsor decision raises questions that will need to be considered by employers as the federal government and employers adjust to the various definitions of marriage in state and federal law.  Employers must consider these emerging issues in light of their own specific benefit plans and business needs.  Employers should be in consultation with their benefits counsel to determine what approach may be best suited to their specific needs.

In the immediate aftermath of the Windsor decision, prudent employers and other plan sponsors should take the following steps:

  • Send appropriate communications to employees about how the Windsor decision potentially impacts their benefits, describing what changes are being made to the benefit plans or policies in light of the decision;

  • Review benefit plans and employee policies to determine the impact of Windsor, if any, on their plans and policies;

  • Determine whether current plan eligibility rules, definitions and policies, specifically as related to the definition of spouse, need to be revised in light of Windsor and then revise applicable documents and forms, as necessary;

  • Where the employer provides domestic partner/civil union partner health benefits, consider whether those benefits should be continued or revised, given that same-sex spouses will be recognized as spouses for purposes of federal law, considering carefully applicable state law requirements and risks; and

  • Ensure that outside administrators, insurers and service providers are administering plans in a manner consistent with the employer's intent and the applicable legal requirements, including with respect to payroll and tax issues, in light of the decision in Windsor.

Tags: DOMA, Defense of Marriage Act, Employer Benefit Plans

Defense of Marriage Act Decision: Potential Impact on Employment Law

Posted on Fri, Mar 29, 2013 @ 09:24 AM

by Jack B. HarrisonJack B. Harrison

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.

Tags: DOMA, Defense of Marriage Act