Recent guidance issued by the U.S. Department of the Treasury, the Internal Revenue Service (IRS) and the Employee Benefits Security Administration (EBSA) division of the U.S. Department of Labor (DOL) provides some initial clarifications on how U.S. v. Windsor will affect benefits for same-sex spouses. The guidance provides that same-sex couples legally married in a jurisdiction with laws authorizing same-sex marriage will be treated as married for federal tax purposes, regardless of whether the couple resides in a state where same-sex marriage is recognized.
The U.S. Department of the Treasury, the Internal Revenue Service (IRS) and the Employee Benefits Security Administration (EBSA) division of the U.S. Department of Labor (DOL) have issued guidance clarifying certain employee benefit plan implications of the Supreme Court of the United States’ ruling in U.S. v. Windsor. In Windsor, the Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional. Section 3 of DOMA had provided that, for purposes of all federal laws, the word “marriage” means “only a legal union between one man and one woman as husband and wife,” and the word “spouse” refers “only to a person of the opposite-sex who is a husband or wife.”
The recent Treasury and IRS guidance, issued in the form of a Revenue Ruling and a set of Frequently Asked Questions, provides that same-sex couples legally married in a jurisdiction with laws authorizing same-sex marriage will be treated as married for federal tax purposes, regardless of whether the couple resides in a state where same-sex marriage is recognized. This IRS approach recognizing same-sex marriages based on the “state of celebration” took effect September 16, 2013. To be clear, the IRS guidance does not apply to registered domestic partners, civil unions or other similar relationships recognized under state law but not denominated as marriage under that state’s law.
The EBSA guidance, Technical Release 2013-04, similarly uses a “state of celebration” rule and provides that, for purposes of the DOL’s regulations and other guidance interpreting ERISA, a spouse will include all legally married same-sex spouses, even if the couple resides in a state that does not recognize such marriages. EBSA intends to issue future guidance addressing specific provisions of ERISA and its regulations.
In other words, the Treasury, the IRS and EBSA have adopted a “state of celebration” rule rather than a “state of residence” rule for recognizing same-sex marriage with respect to employee benefit plans. This consistent approach is helpful, because both the IRS and EBSA have important oversight roles with respect to ERISA plans.
Curiously, however, with respect to leave rights under the Family Medical Leave Act (FMLA), the DOL—of which EBSA is a part—adopted a state of residence rule. The DOL issued that FMLA guidance prior to the Treasury/IRS and EBSA guidance adopting a state of celebration rule. It is unclear whether the DOL will revisit its prior FMLA guidance in light of Technical Release 2013-04. The DOL’s FMLA state of residence approach also conflicts with the state of celebration approach taken by the U.S. Office of Personnel Management with respect to the ability of employees of the federal government and the U.S. Department of Defense to enroll their same-sex spouses in various government benefits, and two courts’ willingness to grant same-sex spousal rights even in states not recognizing same-sex marriages. From an employer’s perspective, it obviously would be preferable to have a consistent result from the various DOL branches.
Employers in all states—not just the 13 states and the District of Columbia where same-sex marriage currently is legal—must prepare for spousal benefit requests from same-sex couples. Same-sex couples residing in states where same-sex marriage is not recognized may travel to states where same-sex marriage has been legalized to marry and obtain federal tax recognition of their marriage. Such benefit requests may relate to any of the employer’s various benefit programs, particularly those benefits where spousal benefits are required by federal law, e.g., spousal protection under qualified retirement plans and special enrollment, and Consolidated Omnibus Reconciliation Act of 1985 (COBRA) rights under health and welfare plans. In addition, employers should review their payroll procedures to ensure the proper federal and state tax treatment of benefits extended to same-sex spouses.
Set forth below is a list of potential implications for a variety of employee benefit programs.
Defined Contribution Plans
- An employee’s same-sex spouse must consent to the employee’s designation of a beneficiary other than the same-sex spouse.
- An employee’s same-sex spouse must be recognized as the default beneficiary under the plan in the event the employee fails to designate a beneficiary or the beneficiary predeceases the employee.
- Plans that permit hardship withdrawals must take an employee’s same-sex spouse into consideration in determining whether the employee is eligible to take certain withdrawals, such as medical, tuition or funeral expenses for the same-sex spouse.
- Plans that permit participant loans must obtain a same-sex spouse’s consent to a loan if the plan currently requires an opposite-sex spouse to consent to a loan.
Defined Benefit Plans
- Spousal survivor benefits in the form of a qualified joint and survivor annuity (QJSA) or qualified optional survivor annuity (QOSA) and a qualified pre-retirement survivor annuity (QPSA) must be extended to same-sex spouses.
- Plans that offer optional payment forms in lieu of the QJSA/QOSA or QPSA payable to a spouse must obtain a same-sex spouse’s consent to the employee’s election of a payment form payable to a beneficiary other than the same-sex spouse.
- Employers should consider how to respond to retroactive benefit claims from an employee with a same-sex spouse who was not recognized at the time payments began or from surviving same-sex spouses. The IRS has indicated that it intends to issue additional guidance on the retroactive implications of the ruling. However, employers may receive claims before the IRS issues its additional guidance.
All Retirement Plans
- Same-sex spouses who divorce may enter into a qualified domestic relations order to divide retirement plan assets.
- Same-sex spouses have the right to directly roll over eligible rollover distributions and must be notified of their rollover rights.
- Required minimum distributions may need to be recalculated for employees with a same-sex spouse and can be delayed for a surviving same-sex spouse.
Medical, Dental and Vision Benefits
- Employers with insured medical, dental or vision benefit plans insured in states where same-sex marriage is legal must extend spousal coverage to same-sex spouses.
- Employers with self-insured medical, dental or vision benefit plans technically are not required to extend spousal benefit coverage to same-sex spouses regardless of the state in which the employer is located. However, such employers face a risk of federal and state discrimination lawsuits if they continue to provide coverage only to opposite-sex spouses.
- An employee may need to be recognized as having a “change in status” event for purposes of adding coverage for a same-sex spouse outside of the annual open enrollment period. Same-sex spouses may make such elections under protections extended to spouses by the Health Insurance Portability and Accountability Act (HIPAA).
- Continuation coverage under COBRA must be offered to same-sex spouses upon termination of employer-provided group medical, dental or vision coverage.
Federal Taxation of Health Benefits
An employee covering a same-sex spouse under the employer’s medical, dental or vision plans must be permitted to pay for the spouse’s coverage using pre-tax contributions under a cafeteria plan and may take tax-free reimbursements from flexible spending accounts (FSAs), health reimbursement accounts (HRAs) and health savings accounts (HSAs) to pay for the same-sex spouse’s qualifying medical expenses. Employer-provided medical, dental or vision benefits for a same-sex spouse will no longer be subject to federal income taxation regardless of whether the employee and his or her spouse reside in a state where same-sex marriage is recognized. Employers that were providing benefits to same-sex spouses prior to the Supreme Court’s DOMA ruling must update their payroll procedures to stop imputing the fair market value of such benefit coverage as federally taxable income of the employee. This same favorable federal tax treatment does not extend to employer-provided benefits for an unmarried same-sex partner, unless the same-sex partner qualifies as the employee’s tax code dependent.
The recent IRS guidance allows employees to claim refunds for open tax years for income and employment taxes paid on imputed income for the value of employer-provided benefits for a same-sex spouse. Employers that provided benefit coverage to same-sex spouses may want to begin preparing for employee requests for a corrected Form W-2 for each open tax year in which the employee paid federal income taxes on benefit coverage for a same-sex spouse. Similarly, employers may claim employment tax refunds based on coverage provided to employees’ same-sex spouses. IRS Notice 2013-61 provides guidance for employers and employees on how to make claims for refunds or adjustments of income and employment taxes.
State Taxation of Health Benefits
Despite the change in the federal tax treatment of benefits for same-sex spouses, such benefits may continue to be subject to state income taxation depending upon the laws of the employee’s state of residence.
In states where same-sex marriage is recognized or where same-sex domestic partnerships or civil unions have been legalized, employees generally will not pay state income taxes on the fair market value of coverage for a non-dependent same-sex spouse. Employees in these states must be permitted to pay for the same-sex spouse or partner’s coverage using pre-tax dollars for state income tax purposes.
In states where same-sex marriage is not recognized, guidance is needed to clarify the rules for taxation of benefits for a same-sex spouse. The state income tax codes in the majority of these states rely on an individual’s adjusted gross income under federal tax laws to calculate the amount of the individual’s state income taxes. Now that benefit coverage for legally married same-sex spouses is no longer subject to federal income taxation, states where same-sex marriage is not recognized will need to clarify whether employees must continue to pay state income tax on the value of benefit coverage for a same-sex spouse.
Employers may need to extend other spousal benefits to employees’ same-sex spouses. These benefits can include group rates for insurance plans, such as supplemental life insurance, long-term care insurance, home insurance and automobile insurance, as well as other benefits such as bereavement leave, moving or relocation expenses, tuition reimbursement, employee discounts and employee assistance programs. As noted above, the DOL’s current position on FMLA creates some potential issues for leave programs as opposed to ERISA programs (although some employers may choose to solve the disconnect by voluntarily adopting a state of celebration approach in both situations).
All employers should take action to ensure that their benefit plans comply with federal laws with regard to benefits for same-sex spouses. In addition to extending required benefits to same-sex spouses, employers should review their payroll procedures with respect to the taxation of such benefits and consider how to communicate these changes to employees.