In 1996, as states were beginning to consider the concept of same-sex marriage, and before any state had acted to permit it, Congress enacted the Defense of Marriage Act. Section 3 of DOMA defined the term “marriage” as “a legal union between one man and one woman as husband and wife,” and defined the term “spouse” as “a person of the opposite sex who is husband or a wife.” Since the enactment of DOMA, these comprehensive definitions have controlled more than 1,000 federal laws in which marital or spousal status is addressed as a matter of federal law, including certain laws impacting employee benefit plans. Currently, 13 states and the District of Columba provide for legal same-sex marriage: California, Connecticut, Delaware, the District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington.
A few months ago, the U.S. Supreme Court issued its much-anticipated decision in United States v. Windsor, ruling that Section 3 of DOMA is unconstitutional because it violates principles of equal protection. While Windsor has significant implications for employee benefit plans, it left employers with a number of unanswered questions. For example, if a same-sex couple was married in a state that recognizes a same-sex marriage and then moved to a state like Oklahoma that does not, would an employer in Oklahoma be required to recognize the marriage for benefit plan purposes?
Last Thursday, the IRS issued some new guidance and answered some of the open questions left by Windsor. The new guidance is effective September 16, 2013. There are a number of important takeaways from the new guidance, but here are a few points worth noting.
First, for federal tax purposes, the IRS will recognize a marriage of same-sex spouses that was valid in the state where it was entered into, even if the married couple resides in a state that does not recognize same-sex marriage. For example, a same-sex couple is married in Delaware, which recognizes same-sex marriage, and then moves to Oklahoma, which does not recognize same-sex marriage. If an Oklahoma employer provides health coverage to an employee and the employee’s same-sex spouse, the value of the coverage provided to the same-sex spouse will no longer be included in the employee’s gross income.
Second, for purposes of satisfying federal tax laws applicable to qualified retirement plans (e.g., a 401(k) plan), a plan must recognize a valid same-sex marriage from another jurisdiction, even if the married couple lives in a state that does not recognize same-sex marriage. For example: Retirement Plan A, a 401(k) plan, is maintained by Employer X, which operates only in Oklahoma. Retirement Plan A must treat an employee-participant who is married to a spouse of the same sex under the laws of California as married for purposes of applying the qualification requirements that relate to spouses, even if the same-sex married couple lives in Oklahoma. If Retirement Plan A provides that when a participant dies the spouse is the default beneficiary unless the spouse has consented to a different beneficiary, if the employee dies, the employee’s same-sex spouse must be the beneficiary unless the same-sex spouse previously consented to a different beneficiary.
Finally, if an employer provided health coverage in prior years for an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, the employee can now file an amended Form 1040 reflecting the employee’s status as a married individual to recover federal income tax paid on the value of the health coverage of the employee’s spouse – for all years for which the period of limitations for filing a claim for refund is open (generally, three years from the date the return was filed or two years from the date the tax was paid, whichever is later). Also, the employer may also claim a refund of, or make an adjustment for, any excess social security taxes and Medicare taxes paid, under a special administrative procedure that will be issued in forthcoming IRS guidance.
The IRS intends to issue further guidance on the retroactive application of Windsor to employee benefit plans, which will likely address (a) the steps employers must take to amend their benefit plans, and (b) any necessary corrections that employers might be required to take relating to plan operations before the future guidance is issued. In the meantime, we strongly encourage you to get with your benefits attorney or advisor and talk through the strategies and steps that you should be taking, if any, before September 16, 2013.