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  1. 1. SUPREME COURT RULES ON SAME-SEX MARRIAGE AND DOMA: STILL WAITING FOR GUIDANCE On June 26, 2013, the United States Supreme Court ruled in a 5-4 decision that § 3 of the Defense of Marriage Act (DOMA) was unconstitutional under the Fifth Amendment of the United States Constitution. Section 3 of DOMA affects more than 1,000 federal laws, including those related to estate and gift taxes, Social Security benefits and tax return filings. Its effect on the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA) will have a significant impact on employers and employer-sponsored plans. In the days and weeks following the decision, many experts asserted that employers must (or must not) take various actions immediately. Adding to the confusion, less than a week after the Supreme Court’s decision, the Treasury Department’s blog noted plans to delay the employer pay or play excise tax until 2015 (the Treasury later issued guidance confirming this delay). All of which left employers and their advisers with many questions to mull over. With the dust finally settling, it appears that employers may be best served by waiting for guidance from the federal agencies that enforce the laws affected by DOMA. This Alert discusses why this is so. BACKGROUND ON DOMA In 1996, President Clinton (D) signed into law DOMA. Section 3 of DOMA defined marriage for all federal law purposes as a union between one man and one woman; the term “spouse” referred only to a person of the opposite sex who is a husband or a wife. Under the law, the federal government did not recognize same-sex marriages for any legal purpose. Individuals in same-sex marriages were, therefore, barred from enjoying those federal marital benefits afforded to individuals in opposite-sex marriages. These benefits include, for example, receiving employer- sponsored health benefits on a tax-free basis and the right to continue health coverage under COBRA. DOMA’s definition of spouse meant that if an employer chose to extend health benefit eligibility to same-sex spouses (or domestic or civil union partners), the employee would be subject to federal income tax on the value of such benefits, assuming the individual did not qualify as a tax dependent for such purposes. DOMA, specifically § 2, also grants states the authority to refuse to recognize same-sex marriages, including those that have been performed in, and recognized by, other states. This section of DOMA was not challenged in the case decided by the Court and remains federal law. Thirteen states and the District of Columbia currently permit same- sex marriage – California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington. Several states recognize similar types of relationships, such as civil unions and domestic partnerships, although the Supreme Court’s decision in United States v. Windsor does not specifically apply to these types of relationships. However, many states do not recognize same-sex marriage or confer any special status upon these types of relationships. ALERTWilllis Human Capital Practice
  2. 2. 2 Willis North America • 8/13 SUPREME COURT’S DECISION IN WINDSOR United States v. Windsor involved a same-sex couple, Edith Windsor and Thea Spyer, married in Canada in 2007 and residing in New York, a state that recognizes same-sex marriage. When Ms. Spyer died in 2010, she left her entire estate to her spouse. Ms. Windsor, however, was barred from claiming the federal estate tax exemption for surviving spouses due to § 3 of DOMA. Ms. Windsor paid the tax bill and sought a refund, which the Internal Revenue Service (IRS) denied. She then brought suit challenging the constitutionality of § 3 of DOMA. Both the United States District Court and the U.S. Court of Appeals for the Second Circuit Court of Appeals held that this section of DOMA is unconstitutional and ordered the U.S. to pay a refund. The U.S. Supreme Court affirmed the holding of the appeals court. HOW THE RULING AFFECTS EMPLOYER-SPONSORED HEALTH BENEFITS Federal laws, such as the IRC, ERISA and COBRA, use the terms “spouse” and “marriage” to define and explain who is specifically entitled to the rights and benefits granted under those laws. With the Court’s ruling that DOMA’s definition of marriage is unconstitutional, these terms are no longer limited to opposite-sex spouses. The Court’s opinion appeared to limit itself to those same-sex marriages “made lawful by the State,” but this does nothing to clarify which same-sex marriages are recognized and for what purposes. This means, for example, that some – but possibly not all – same-sex spouses could now meet the COBRA definition of a qualified beneficiary and have an independent right to elect and maintain COBRA (a right opposite-sex spouses already enjoy). The Court’s ruling does not answer the many questions that employers have, particularly when it comes to determining who exactly is a same-sex spouse and therefore entitled to federal benefits. Such questions as: n Will the federal agencies limit themselves to just same-sex marriage or will they extend rights and benefits to civil unions or domestic partnerships (e.g., spousal equivalent laws)? n Must the same-sex spouses reside in a state that recognizes same-sex marriage to be entitled to federal benefits or is it sufficient that they have been legally married in a state that allows such marriages (state of “residence” vs. state of “celebration”)? n Will the agencies extend federal benefits retroactively and, if so, what does an employer need to do to address? n Must employers extend benefits to same-sex spouses or can they choose to exclude them? n What will happen in states that do not specifically recognize same-sex marriage but where the state tax code conforms to federal income tax law? While same-sex spouses residing in a state that recognizes same-sex marriage may be clearly entitled to federal benefits, until the employer knows how the relevant agencies are answering these questions, any changes they make are likely to be over- or under-inclusive, and will need to be repeated or, worse, corrected after the fact. An employer also runs considerable risk if it guesses wrong. For example, an employer who adjusts its payroll to allow same-sex spouses to participate in its cafeteria plan and pay for coverage on a pre-tax basis and ceases to impute income on the value of the benefits provided to such same-sex spouses may have to go through this process again if federal regulatory agencies determine that any same-sex couple legally married in a state that allows for such marriages, regardless of where they reside, is also entitled to federal benefits. Not only would there be the administration issues to consider, but the employer could be putting its plan at risk for disqualification if it extends tax benefits to individuals who are not entitled to them.
  3. 3. 3 Willis North America • 8/13 NEXT STEPS While we wait for agency guidance on the many issues raised by the Supreme Court’s ruling on DOMA, it is important for employers to take the time to study what these changes could mean for them and their benefit plans. STEP ONE: KNOW WHAT YOU HAVE Employers should have a clear understanding of what their plan currently provides and how they have interpreted and applied those provisions in the past. The Supreme Court’s ruling, since it dealt with the definitions of spouse and marriage, highlights the importance of clearly worded eligibility in plan documents. Some employers may find that when it comes to the issue of same-sex spouses, their current eligibility is too vague, or the subject is not addressed at all. A plan that covers spouses by referencing state law, uses the term “legal spouse” or that does not define the term “spouse” at all, could automatically be deemed to cover same-sex spouses, even if that is not the employer’s intent. Employers that currently exclude same-sex spouses will need to review the terms of their plan, particularly if they reference DOMA and its definition of marriage. Furthermore, employers may not know if someone they are covering qualifies as a same-sex spouse. Even if the employer currently extends coverage to domestic partners and same-sex spouses, it may not have differentiated between same-sex spouses and other spousal-equivalent relationships when it comes to the administration of their benefit plans. Changes to the employer’s current processes may be necessary to capture this information. STEP TWO: KNOW WHAT YOU WANT Employers should have a clear idea as to whom they wish to cover under their benefit plans and should analyze their current benefit eligibility to determine if the terms of the plan are in agreement with that decision. For example, do the current terms of the plan extend eligibility (by design or default) to the following individuals (and is this the employer’s intent)? n Common law spouses n Legally separated spouses n Spouses eligible for coverage through their own employer’s plan n Step-children n Children for whom the employee is a legal guardian n Grandchildren An employer cannot realistically begin the plan amendment process until it knows who it wants or needs to cover. Many employers are currently pondering the benefit eligibility issue in light of health care reform and its many requirements. Under the employer pay or play mandate, large employers – those with 50 or more full- time employees (generally counting part-time employees as fractions) – may incur a penalty tax unless they meet standards for offering health coverage to their full-time employees. Specifically, no employer will incur the penalty tax if it offers its full-time employees and those employees’ dependents “minimum essential coverage” and, with respect to the full-time employees, the coverage is affordable and provides minimum value. While the health care reform law generally defines a full-time employee as being employed for an average of at least 30 hours of service per week, the employer may currently have a different definition or have certain classifications of employees that are excluded regardless of the number of hours worked in a week (e.g., temporary or seasonal). The pay or play excise taxes require coverage for full-time employees and their dependents, but the term dependents does not include spouses. The pay or play excise tax was set to become effective for coverage provided during 2014, but the IRS announced a delay of the pay or play penalties and related information reporting requirements until 2015 (other requirements under the health care reform law that are effective in 2014 are not affected). As employers anticipate implementing whatever guidance is coming from federal agencies regarding the DOMA decision and prepare to comply with health care reform provisions other than pay or play, the pay or play delay is particularly welcome.
  4. 4. 4 Willis North America • 8/13 STEP 3: WAIT FOR GUIDANCE While the ruling has generated many employee questions regarding their employer-sponsored health benefits and has resulted in employees demanding immediate changes, employers must approach the issue carefully and thoughtfully. Acting immediately, such as amending the employer’s plan to include or exclude same-sex spouses and changing current payroll processes to stop reporting imputed income, without having the necessary guidance, could result in having to undo or redo changes once the agencies release guidance. CONCLUSION The full implications of this decision and its effect on employers and employer-sponsored plans are unclear. Additional guidance from the IRS and other regulatory agencies is needed. Employers should consult with their tax advisers and legal counsel before changing their benefit plans in response to the ruling. The National Legal & Research Group will continue to provide updates on guidance, as it becomes available.
  5. 5. NEW ENGLAND Auburn, ME 207 783 2211 Bangor, ME 207 942 4671 Boston, MA 617 437 6900 Burlington, VT 802 264 9536 Hartford, CT 860 756 7365 Manchester, NH 603 627 9583 Portland, ME 207 553 2131 Shelton, CT 203 924 2994 NORTHEAST Buffalo, NY 716 856 1100 Morristown, NJ 973 539 1923 Mt. Laurel, NJ 856 914 4600 New York, NY 212 915 8802 Norwalk, CT 203 523 0501 Radnor, PA 610 254 7289 Wilmington, DE 302 397 0171 ATLANTIC Baltimore, MD 410 584 7528 Knoxville, TN 865 588 8101 Memphis, TN 901 248 3103 Metro DC 301 581 4262 Nashville, TN 615 872 3716 Norfolk, VA 757 628 2303 Reston, VA 703 435 7078 Richmond, VA 804 527 2343 Rockville, MD 301 692 3025 SOUTHEAST Atlanta, GA 404 224 5000 Birmingham, AL 205 871 3300 Charlotte, NC 704 344 4856 Gainesville, FL 352 378 2511 Greenville, SC 704 344 4856 Jacksonville, FL 904 562 5552 Marietta, GA 770 425 6700 Miami, FL 305 421 6208 Mobile, AL 251 544 0212 Orlando, FL 407 562 2493 Raleigh, NC 704 344 4856 Savannah, GA 912 239 9047 Tallahassee, FL 850 385 3636 Tampa, FL 813 281 2095 Vero Beach, FL 772 469 2843 MIDWEST Appleton, WI 800 236 3311 Chicago, IL 312 288 7700 312 348 7700 Cleveland, OH 216 861 9100 Columbus, OH 614 326 4722 Detroit, MI 248 539 6600 Grand Rapids, MI 616 957 2020 KEY CONTACTS U.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONS Willis North America
  6. 6. Milwaukee, WI 262 780 3476 Minneapolis, MN 763 302 7131 763 302 7209 Moline, IL 309 764 9666 Pittsburgh, PA 412 645 8506 Schaumburg, IL 847 517 3469 SOUTH CENTRAL Amarillo, TX 806 376 4761 Austin, TX 512 651 1660 Dallas, TX 972 715 2194 972 715 6272 Denver, CO 303 765 1564 303 773 1373 Houston, TX 713 625 1017 713 625 1082 McAllen, TX 956 682 9423 Mills, WY 307 266 6568 New Orleans, LA 504 581 6151 Oklahoma City, OK 405 232 0651 Overland Park, KS 913 339 0800 San Antonio, TX 210 979 7470 Wichita, KS 316 263 3211 WESTERN Fresno, CA 559 256 6212 Irvine, CA 949 885 1200 Las Vegas, NV 602 787 6235 602 787 6078 Los Angeles, CA 213 607 6300 Phoenix, AZ 602 787 6235 602 787 6078 Portland, OR 503 274 6224 Rancho/Irvine, CA 562 435 2259 San Diego, CA 858 678 2000 858 678 2132 San Francisco, CA 415 291 1567 San Jose, CA 408 436 7000 Seattle, WA 800 456 1415 Theinformationcontainedinthispublicationis notintendedtorepresentlegalortaxadviceand hasbeenpreparedsolelyforeducational purposes. Youmaywishtoconsultyourattorney ortaxadviserregardingissuesraisedinthis publication. Willis North America