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Supreme Court Issues Decisions Affecting Health, Welfare, and Retirement Benefits for Same-Sex Couples

Employee Benefits Law Alert John L. Barlament, Amy A. Ciepluch, Alyssa D. Dowse

On June 26, 2013, the United States Supreme Court issued a decision in United States v. Windsor ("Windsor"), holding that benefits offered under federal law to opposite-sex spouses must also be offered to same-sex spouses in the states that recognize same-sex marriage. Employers should carefully review their health, welfare, and retirement plans and implement any changes that may be necessary to comply with the Court's ruling. Employers that operate in multiple states will also need to determine the best way to administer their plans under the inconsistent state laws regarding same-sex marriage.

 Q&B Key: On June 26, 2013, the Court also issued a decision addressing same-sex marriage in California. In Hollingsworth v. Perry, the Court ruled that the petitioners in that case did not have standing to contest a trial court's decision that had overturned California's ban on same-sex marriage (known as "Proposition 8"). It appears that under Hollingsworth same-sex marriage will again be legal in California. Hollingsworth does not affect health, welfare, or retirement plans on a national level.

Brief Summary of United States v. Windsor. In Windsor, the Court ruled in a 5-4 decision that Section 3 of the Defense of Marriage Act ("DOMA") violates equal protection under the Fifth Amendment to the United States Constitution. Section 3 of DOMA defines "marriage" as "a legal union between one man and one woman" and "spouse" as "a person of the opposite sex" for purposes of federal law. Accordingly, federal law will generally defer to state law on which individuals are in a "marriage" and who is a "spouse."

The Court's decision applies only to "lawful" same-sex marriages, meaning that the marriage must be lawful based on state law. The District of Columbia and the following 13 states currently recognize same-sex marriage as legal: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington. (Some of these states have laws that will take effect soon.)

 Q&B Key: Under Section 2 of DOMA (which was not challenged in Windsor), states are not required to recognize same-sex marriages that occur in other states. It is unclear whether a same-sex couple that is married in a state that recognizes such marriages will receive federal benefits after moving (or returning home) to a state that does not recognize such marriages. (Does the law of the state of in which the marriage ceremony occurred or the state in which the couple resides control for federal benefit purposes?)

Complicated Impact of Windsor on Health, Welfare, and Retirement Plans. Windsor raises several considerations for employers with respect to all their benefit plans, including health and welfare plans, retirement plans, and nonqualified deferred compensation plans. The following tables summarize the possible effects on these plans.

 Q&B Key: Windsor does not invalidate the state bans on same-sex marriages that currently exist in 35 states. In addition, Windsor does not specifically affect benefits provided to same-sex domestic partners of employees.

Health and Welfare Plan Consideration Implications of Windsor with respect to Same-Sex Spouses*
Coverage for Same-Sex Spouses
  • Health and welfare plans generally not required under federal law to cover spouses
  • Employers should review how health and welfare plans define "spouse." If "spouse" is not defined, can be ambiguity about whether same-sex spouses are covered. If "spouse" is defined, term may now include same-sex spouses, which employer may or may not desire. Employer may want to amend all health and welfare plans to define "spouse"
  • If employer wishes to cover opposite-sex spouses but exclude same-sex spouses, employer should examine nondiscrimination laws
Tax on Health Benefits Provided to Same-Sex Spouse
  • Before Windsor, value of same-sex spousal coverage generally taxable at federal level
  • After Windsor value of same-sex spousal coverage generally not taxable at federal level
  • Taxation at state level does not always track federal treatment. Employer may want to examine whether same-sex coverage is taxable at state level
  • Employer should adjust payroll system and discuss with payroll vendor
  • Employees and employers may want to consider whether to seek a refund of taxes paid (prior to Windsor) on value of same-sex coverage
Tax on Health Benefits Provided to Children of Same-Sex Spouses
  • Prior to Windsor, health benefits provided to child of employee's same-sex spouse generally taxable (unless child is also employee's tax dependent)
  • After Windsor, unclear whether these health benefits now provided to such child on a tax favored basis
Employment Taxes
  • Prior to Windsor, employers pay employment taxes on value of health benefits provided to an same-sex spouse or child of employee's same-sex spouse
  • After Windsor, unclear whether employers and / or employees entitled to refund of some or all of such employment taxes
HSA, FSA and HRA Reimbursements
  • Reimbursements generally allowed for employee or spouse's expenses
  • Appears non-taxable reimbursements allowable under HSA, FSA and HRA for same-sex spouses
  • Employer should verify how FSA and HRA define "spouse"
  • Employer may want to communicate change relating to HSAs
  • HSAs contain some special rules regarding spouses (e.g., some special family limits) which will require future IRS guidance
 COBRA
  • If health or welfare plan covers employee's same-sex spouse, plan generally will need to provide COBRA continuation rights to same-sex spouse
 FMLA
  • Employees likely can take FMLA leave to take care of a same-sex spouse
HIPAA Special Enrollment Rights
  • Appears same-sex spouses receive same HIPAA special enrollment rights as opposite-sex spouses
Domestic partner coverage
  • Employers should review policies regarding domestic partner coverage, including tax gross-ups, under health and welfare plans to determine if policies are still necessary
  • Although not required by federal law, employers may want to keep such policies in place for employees in states which do not recognize same-sex marriage
Cafeteria Plan
  • Cafeteria plan can generally be modified to pay for same-sex coverage on pre-tax basis
  • "Change in status" rules which refer to spouses presumably also now include same-sex spouses
Retirement Plan Consideration Implications of Windsor with respect to Same-Sex Spouses*
Spousal Annuities and Death Benefits
  • Same-sex spouses treated as spouses for purposes of qualified joint and survivor annuity ("QJSA") and qualified optional survivor annuity rules under certain retirement plans
  • Normal form of benefit for participant with a same-sex spouse under certain retirement plans will now be QJSA
  • Same-sex spouses will be eligible for qualified preretirement survivor annuity benefit under certain retirement plans if the participant dies prior to retirement
Spousal Consent Requirements
  • Retirement plans generally will need to provide spousal consent rights to same-sex spouse when participant takes certain actions, such as requesting change in beneficiary designation or electing optional form of benefit under pension plan
Default Beneficiary
  • Many retirement plans currently list participant's spouse as his or her beneficiary in the event that he or she dies without valid beneficiary designation. This default beneficiary designation may now include same-sex spouses.
Spousal Rollovers for Same-Sex Spouses
  • Spousal rollovers must generally be allowed with respect to participant's same-sex spouse
Required Minimum Distributions
  • Required minimum distribution rules allow surviving spouses to defer distributions following participant's death under certain circumstances
  • Same-sex spouses will likely be treated as spouses for purposes of required minimum distribution rules
Qualified Domestic Relations Orders
  • Retirement plans generally will need to honor qualified domestic relations orders ("QDROs") that award participant's benefits to his or her same-sex spouse
  • Unclear whether requirement plan will be required to honor QDRO from court in another state
Hardship Distributions
  • Participant may be entitled to a hardship distribution from retirement plan (if such distributions are allowed under the terms of the plan) due to uninsured medical expenses, payment of tuition, or payment for burial or funeral expenses for the participant's same-sex spouse
Other Benefit Plan Consideration Implications of Windsor with respect to Same-Sex Spouses*
Nonqualified Deferred Compensation Plans
  • Nonqualified plans may provide benefits to a participant's spouse in the event of the participant's death
  • Employer should verify how plans define "spouse"
  • Employer may need to amend plan to define "spouse" to be consistent with employer's intent
Collectively-Bargained Plans
  • No exclusion in Windsor for collectively-bargained plans so effect seems to be immediate, even if collective bargaining agreement ("CBA") still in effect
  • Employer should review CBA to determine effect, if any, of Windsor
Church Plans
  • Some religious employers may want to exclude (or continue excluding) same-sex spouses from receiving benefits under church plans (both health plans and retirement plans)
  • Unclear how Windsor will affect church plans and the complicated federal laws that apply to such plans
  • Religious employers should verify how plans define "spouse." If "spouse" is not defined, can be ambiguity about whether same-sex spouses are covered. If "spouse" is a defined term, it may now include same-sex spouses, which may or may not be consistent with church governing policies and objectives
  • Employer should examine nondiscrimination laws prior to excluding same-sex spouses

*As used in the above tables, the term "same-sex spouse" means an employee's same-sex spouse who is recognized under state law as the employee's legal spouse. Note our "Q&B Key" above, which discusses the lack of clarity regarding which state law will apply.

Communicating the Changes. Given the large number of possible effects and changes noted above, we suspect many employers will want to explain to employees -- especially newly-benefiting same-sex spouses -- these changes. This is a sound strategy, but employers will likely need to work through some of the legal complications of the Windsor decision. Employers may also need to make some policy decisions. For example, if the employer previously did not cover any same-sex domestic partners under its health plan but now will cover same-sex spouses, does the employer wish to continue excluding same-sex domestic partners? Will such an exclusion create employee relations issues?

Effective Date of Windsor Changes. Windsor did not specifically state when any changes required by its decision will become effective. Nor is it clear whether the decision is retroactively effective. Accordingly, it is unclear how quickly employers must act to implement any changes that need to be made. However, we recommend that employers act as soon as possible to review their plans and make any necessary changes. In addition, employers should contact their insurers, third party administrators, and payroll administrators to determine what steps need to be taken to provide any required benefits to same-sex spouses (such as COBRA rights, pre-tax payment of health benefits, and spousal consent for retirement plan distributions).

As noted above, there are many questions that will need to be answered over the coming weeks and months. Shortly after the Court released its decision in Windsor, the Obama Administration stated that it would work swiftly to revise regulations and provide further guidance.

Links to Cases: The Hollingsworth decision can be found here.

For more information, contact the authors of this alert: John Barlament at (414) 277-5727 / john.barlament@quarles.com, Amy Ciepluch at (414) 277-5588 / amy.ciepluch@quarles.com, or Alyssa Dowse at (414) 277-5607 / alyssa.dowse@quarles.com. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (414) 277-5453 / marla.anderson@quarles.com; Sarah Fowles at (414) 277-5287 / sarah.fowles@quarles.com; Angie Hubbell at (312) 715-5097 / angie.hubbell@quarles.com; David Olson at (414) 277-5671 / david.olson@quarles.com; Robert Rothacker at (414) 277-5643 / robert.rothacker@quarles.com or your Quarles & Brady attorney.