Same-Sex Spouses—What Does This Mean for Employers?
On June 26, 2013, in United States v. Windsor, the United States Supreme Court found unconstitutional Section 3 of the Defense of Marriage Act (“DOMA”). Section 3 of DOMA prohibited the federal government from acknowledging marriages between same-sex spouses. Following Windsor, the federal government may no longer distinguish between same-sex and opposite-sex marriages; however, Windsor does not require individual states to acknowledge same-sex marriage and states presently appear free to define marriage as they wish. At the time of the Windsor ruling, twelve states and the District of Columbia recognized same-sex marriages. Because the definition of “spouse” and “marriage” impact a variety of human resource issues, including, FMLA obligations, COBRA continuation coverage, consents to beneficiary designations in 401(k) plans, and other employee benefit plan coverage issues, the Windsor ruling left many unanswered questions for employers.In the last two weeks, the Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”) both have issued guidance regarding each agency’s definition of spouse and marriage following the Windsor decision. These federal agency announcements answer several important questions for employers. First, in late August 2013, the DOL revised its guidance documents regarding FMLA rights and obligations. Under the revised DOL guidance, the definition of spouse for FMLA purposes now includes individuals who have entered into a same-sex marriage recognized by the law of the state where the employee resides. This is sometimes referred to as the “state of residence” rule. Applying the DOL’s revised guidance, an employer is now required to provide FMLA leave to an employee seeking leave in order to care for a same-sex spouse with a serious health condition if the employee resides in a state that recognizes same-sex marriage. The state of residence rule creates confusion for employers with employees located in more than one state. Some employers may decide to simply adopt a uniform rule without regard to state of residence of the employee. For California employers, employees located in California were already entitled to California Family Rights Act leave to care for a registered domestic partner.
The IRS also issued a post-Windsor ruling in August 2013. The IRS ruling concludes that for purposes of federal tax law, the IRS will recognize the marriage of a same-sex couple if the marriage is recognized by the state of celebration, even if the couple moves to or resides in a state that does not recognize same-sex marriage. This is sometimes referred to as the “state of celebration” rule. This IRS ruling provides employers with a uniform rule of application for federal tax purposes that will apply to all employees in all states in which the employer operates. The effective date of the IRS ruling is September 16, 2013. Under this IRS ruling, an employer must treat an employee’s same-sex spouse the same as an opposite-sex spouse in order to satisfy federal tax laws that relate to qualified retirement plans. One obvious manner in which the issue will present itself is beneficiary designations and definitions of default beneficiaries in plan documents. A prudent employer may need to gather information about whether “unmarried” plan participants are actually in a same-sex marriage that qualifies under the state of celebration rule in order to avoid incorrect payment of benefits.
The IRS ruling will have a significant financial impact for employees who had health coverage for their same-sex partners through their employer. Under the IRS ruling, an employee (married to a same-sex spouse who qualifies for health coverage under the employer’s plan) will no longer have the value of that coverage imputed as taxable income. The IRS ruling is allowing couples to retroactively file their taxes jointly for prior tax years still open under the statute of limitations, which is typically three years. This means that same-sex couples can file a refund claim for tax years 2010, 2011, and 2012. Additionally, if a taxpayer has previously signed an agreement with the IRS that maintains the open status of the statute of limitations, refund claims can be filed for years 2009 and earlier.
The Windsor ruling has a host of other impacts on benefits. For example, COBRA-mandated health care continuation coverage is only available in the event of a qualifying event that results in a loss of coverage to spouses of the opposite sex. Following the Windsor decision, COBRA coverage must be made available to a same-sex spouse on the same terms as an opposite-sex spouse. A variety of other plan-related issues must also be considered, including, expense reimbursement under health savings accounts and health care flexible spending accounts, default beneficiary issues and hardship distributions.
It is recommend that employers conduct a thorough review of all policies, as well as health and welfare plans and retirement plans, to determine what changes must be implemented in order to become compliant with the law following the Windsor decision.