For many years, the Defense of Marriage Act (DOMA) defined marriage under federal law as a legal union between one man and one woman. In June 2013, however, in the case of United States v. Windsor, the Supreme Court of the United States declared this DOMA provision (known as “Section 3”) to be unconstitutional. On August 29, 2013, the U.S. Department of the Treasury issued its first major guidance on how the Windsor case impacts federal tax law. The Internal Revenue Service (IRS) issued Revenue Ruling 2013-17 and two associated FAQs concerning the federal tax treatment of same-sex marriages and civil unions or registered domestic partnerships. The following is a brief discussion of the implications, open issues, and recommendations for employee benefit plans in light of this guidance.
- After Windsor, what constitutes a marriage for tax purposes? Rev. Rul. 2013-17 states that, for federal tax purposes, if a marriage is legal and recognized in the state or foreign country in which it was entered, the marriage is recognized by the U.S. government for federal tax purposes. Even if the married couple should reside in a state where the marriage is not recognized under state law, federal tax law will treat the same-sex couple as legally married. Rev. Rul. 2013-17 does not extend such recognition to other formal relationships, such as registered domestic partnerships or civil unions.
- When is Rev. Rul. 2013-17 effective? The ruling is primarily prospective and will take effect for most purposes, on September 16, 2013. Taxpayers have the right to seek a return of income taxes paid in open prior years for amounts that would have been tax-free if the federal government had recognized the marriage during that period. The FAQs state that employers may make adjustments for current year federal income tax withholding if the amount over-withheld is returned to the employee by year end.
- How does Windsor affect retirement plans? The Internal Revenue Code requires certain benefits and options for spouses as conditions of tax qualification of retirement plans, such as default survivor annuity benefits for married participants and qualified domestic relations orders for the assignment of retirement benefits during a legal separation or divorce. Rev. Rul. 2013-17 and the associated FAQs clarify that effective September 16, 2013, retirement plans must recognize the spouses of same-sex marriages and extend to them the same rights that spouses of opposite sex couples previously enjoyed. Future guidance will address how the Windsor decision will be applied retroactively and provide the proper timing and content for plan amendments.
- How does Windsor affect the tax treatment of health and welfare plans? Prior to Windsor, health and welfare benefits provided to same-sex spouses, domestic partners, or couples in a civil union, were taxable to the employee. As a result, employers had to impute income on the employee’s W-2 for such benefits. After Windsor, under Rev. Rul. 2013-17, health and welfare benefits for same-sex spouses are generally excluded from income for federal tax purposes (although benefits extended to domestic partners and those in a civil union continue to be taxable to the employee). The FAQs promise further guidance regarding adjustments and refunds for employment taxes.
- What other changes will be required for health and welfare plans? Certain health plan requirements, such as special enrollment rights under the Health Insurance Portability and Accountability Act (HIPAA) and the continuation of group health coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) for recognized same-sex spouses, are likely to require amendments to health plans that cover spouses. Employers will also need to revise cafeteria plans to allow premium reimbursement for same-sex spouse coverage pre-tax and to permit the reimbursement of the medical expenses of same-sex spouses by health care flexible spending accounts. The FAQs indicate that all limits and rules applicable to opposite-sex married couples now apply to legally married same-sex couples. Where applicable, this means plans must impose a single family maximum contribution to both spouses in a same-sex marriage.
- Does this decision change rights retroactively? As Rev. Rul. 2013-17 makes clear, the Windsor decision will be applied retroactively, although to what extent remains an open question. Employees and their same-sex spouses have already filed claims for benefits to which they would have been entitled if DOMA had not barred recognition of their marriages. In Cozen O’Connor PC v. Tobits, No. 11-0045 (July 29, 2013), the Eastern District of Pennsylvania read Windsor to require the payment of a 2010 death benefit to a same-sex spouse, even though the benefit pre-dated the decision in Windsor. It will likely take some time for courts to sort out when and to what extent same-sex spousal benefits are due retroactively. Rev. Rul. 2013‑17 promises additional guidance on the retroactive impact of the Windsor decision on employee benefit plans is forthcoming.
- For employers in states that do not recognize same-sex marriages, will anything change? The critical message from Rev. Rul. 2013-17 is that companies in all 50 states must focus on how Windsor impacts federal tax law. All employers must be prepared to amend and administer plans to reflect federal tax law’s recognition of same-sex spouses.
- What should employers do now? Starting on September 16, 2013, any same-sex spouse must be recognized prospectively if benefits are required under federal tax law (e.g., survivor annuities, consent requirements, etc.) or if plans are already extending benefits to same-sex spouses. In addition, employers must prepare now to implement plan design and administration changes, as well as plan communications to describe those changes. While awaiting further guidance about the application of Windsor to benefit plans, employers should take the following steps:
- Consider the company’s goal. Does the employer have a position regarding the extension of benefits to same-sex couples, and does it wish to extend benefits beyond those required by law?
- Identify benefits currently available for spouses under its benefit plans (e.g., death benefits, medical coverage eligibility, reimbursements for spousal expenses).
- Review how each plan defines “spouse” and whether same-sex spouses fall within the current definition.
- Gather data on the workforce, e.g. how many employees have entered into same-sex marriages, domestic partnerships, and/or civil unions, and in which states do they reside.
- Manage the risk of litigation through the use of thoughtful, honest communications with employees who inquire about benefits while the company is assessing its options.
If you have any questions about the implications of Windsor, Rev. Rul. 2013-17, and the changes they require, please feel free to contact a member of the Ogletree Deakins Employee Benefits practice group.
Stephen A. Riga is an associate in the Indianapolis office of Ogletree Deakins.