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UPDATED CLIENT ALERT: Supreme Court Decision Holding That Section 3 of the Defense of Marriage Act is Unconstitutional Will Affect Employee Benefit Plans

The following client alert from July 2013 has been updated to reflect new guidance from the IRS.
April 2014
Manes M. Merrit and Barry L. Salkin

On June 26, 2013, the Supreme Court held in United States v. Windsor that Section 3 of the Defense of Marriage Act (“DOMA”), which defines marriage as a legal union between a man and a woman for purposes of all federal laws, is unconstitutional.  The Supreme Court’s opinion will affect over 1,100 federal laws that provide rights and benefits to married couples, including provisions under ERISA and the Internal Revenue Code (“Code”).  However, the decision did not address whether a state could define marriage as a legal union between a man and a woman.  Hence, state statutes that define marriage in that manner are unaffected.  In those states in which same-sex marriage is recognized by a defined benefit pension plan, a same-sex spouse must now be eligible to receive a qualified joint and survivor annuity, and a qualified preretirement survivor annuity, which could cause an increase in a plan’s required minimum funding contribution.  In the event of the dissolution of a same-sex marriage, the participant’s partner may now be able to seek a qualified domestic relations order.  In a defined contribution plan, in the absence of a designated beneficiary, the same-sex spouse will now be treated as a beneficiary.

With respect to group health plans, same-sex spouses will be able to receive coverage on a pre-tax basis, even if they do not satisfy the Code requirement to be the employee’s dependent and can apply for income and employment tax refunds for open tax years.  For this reason, employers should consider discontinuing the practice of charging participants with imputed income for the coverage of their same-sex spouses.  It remains an open issue as to whether health plans that offer coverage to opposite-sex couples must now also cover same-sex couples.  Further, same-sex spouses will be eligible to elect COBRA, and they can be covered under flexible spending and health savings accounts.  However, the federal tax treatment of civil unions and domestic partnerships may be unaffected.

Issues relating to the administration of plans with some employees residing in jurisdictions that recognize same-sex marriages and others residing in jurisdictions that do not recognize same-sex marriages remain.  Plan language specifying which state law should apply will become important.  Hopefully, the IRS will establish a uniform rule stating whether the validity of a marriage will be determined where the marriage occurred, or where the participants reside.  With respect to employers with offices in different states, some but not all of which recognize same-sex marriages, employers may decide it is easier to recognize same-sex marriages in all of the jurisdictions in which its participants reside.

The Supreme Court decision did not address whether the decision will be applied retroactively.  The Constitution does not require retroactive application, and the Supreme Court will sometimes take into account practical considerations.  If courts determine that the decision has retroactive effect, the IRS could, as it has done in the past, provide relief by allowing plans to comply with the Windsor decision operationally on a prospective basis, even if the plans generally need to be amended back to 1996.  Even if the IRS does provide transitional relief, such actions will not preclude participants from commencing legal actions, subject to statute of limitations and other possible defenses.  This is a critical issue, to the extent there is a fiduciary duty under ERISA to seek out individuals who would have been entitled to benefits had Section 3 of DOMA never been enacted.  We believe there will be regulatory activity in this area over the next several months as the IRS and DOL grapple with these issues.

See the Client Alert by our Employment Practices group discussing the effect of the Windsor decision on the Family and Medical Leave Act.

Update

In Revenue Ruling 2013-17, the IRS adopted a general rule recognizing a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same-sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriage.  However, the term “spouse” does not include individuals (whether of the opposite sex or the same-sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of such state, and the term “marriage” does not include such formal relationships.  In Technical Release 2013-04, the DOL indicated that it would also recognize same-sex marriages based on the state of celebration, rather than the state of the participant’s domicile.

In Revenue Ruling 2013-17, the IRS also provided that taxpayers could rely upon its holdings retroactively with respect to any employee benefit plan for purposes of filing tax returns or amended tax returns or claims for a refund or credit for open tax years (generally three years from date of filing) with respect to employer-provided health coverage or fringe benefits that are generally excludible from income.

In Notice 2013-61, the IRS set forth special administrative procedures for employers who want to make adjustments or claims for refund or credit of employment taxes paid with respect to the value of same-sex spousal benefits that are excludible from income and wages under Windsor.  On December 16, 2013, in Notice 2014-1, the IRS amplified its earlier guidance by extending the relief available to employees who had purchased coverage for a same-sex spouse by permitting a mid-year election change under a cafeteria plan, and also permitting an employee’s flexible spending account to reimburse expenses for a same-sex spouse in 2013, even if the employee had elected self-only coverage.

In Notice 2014-19, the IRS amplified upon its guidance in Revenue Ruling 2013-17.  First, all qualified retirement plans must reflect the outcome of Windsor as of June 26, 2013, but their tax-qualified status will not be adversely affected if they do not recognize same-sex spouses as spouses prior to that date.  Second, a plan may recognize the Windsor decision for some or all purposes prior to that date.  Third, whether a plan needs to be amended to reflect the Windsor decision depends upon the specific plan language.  For example, any plan that referenced DOMA will need to be amended.  In addition, if Windsor is to be applied for any purposes under a plan before June 26, 2013, the plan must specify the date and the purposes.  Fourth, for most plans any amendments to comply with Windsor must be adopted by December 31, 2014.  Fifth, effective September 16, 2013, in determining the validity of a same-sex marriage, a plan must look to the state or foreign jurisdiction in which the marriage was celebrated, rather than the state of the participant’s domicile.

Please contact the Olshan attorney with whom you regularly work or either of the attorneys listed below if you have any questions regarding the effect of the Windsor decision on employee benefit programs.

This publication is issued by Olshan Frome Wolosky LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship.  To ensure compliance with requirements imposed by the IRS, we inform you that unless specifically indicated otherwise, any tax advice contained in this publication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.  In some jurisdictions, this publication may be considered attorney advertising.
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