Employers around the country are scrambling to revise benefit plans and policies as same-sex marriage goes mainstream. Nineteen states and the District of Columbia now recognize same-sex marriage, and court challenges supporting same-sex unions have been filed in each of the remaining 31 states. Decisions striking down state bans on same-sex marriage arrive weekly… Since the U.S. Supreme Court’s landmark ruling last year in U.S. v Windsor, same-sex proponents have yet to lose a case.
The Windsor court struck down a federal law that limited the terms “spouse” and “marriage” to heterosexual couples. While Windsor did not rule on the constitutionality of state laws or other state provisions banning same-sex marriage, it has framed the argument ever since, making it clear that it is simply a matter of time before same-sex marriage becomes universal. What should employers do to amend their benefit plans and policies to remain in legal compliance as the law changes daily? The answer depends on what type of benefit plan is under review.
Qualified retirement plans such as 401(k)s, profit sharing plans and pension plans
After Windsor, all qualified plans must treat persons who are validly married as “spouses” and “married,” even if the couple lives in a state that does not recognize same-sex marriage. For example, if a plan requires spousal consent for a participant to receive a distribution or be eligible for a loan or hardship distribution, same-sex spouses who are validly married must be consulted. Rollovers, beneficiary designations and minimum distribution provisions also must take same-sex marriages into account. Similarly, qualified domestic relations orders must benefit those whose same-sex marriages end in divorce. The IRS has stated that qualified plans must be administered in compliance with Windsor as of June 26, 2013, the date Windsor was handed down. Employers should review their qualified plan documents to make sure that plan definitions and written procedures do not need updating. If they do, the IRS requires that these changes be effective retroactive to June 26, 2013, and that they be made no later than (1) the end of the plan’s remedial amendment period or (2) December 31, 2014. Employers who wish to make Windsor effective prior to June 26, 2013 may do so, but should consider administrative problems that can arise.
Federal tax laws
Employers also need to ensure that payroll systems are up to date. Before Windsor, employees paid federal taxes on the cost of same-sex benefits provided to their partners, even if they were validly married. This meant that a portion of the premiums paid by employees for such coverage was after-tax, and that a portion of the premiums paid by employers resulted in imputed income to the employee. Post-Windsor, however, these benefits are provided pre-tax, so the federal taxation of these benefits changed. In addition, employees and employers now have an opportunity to apply to the IRS for a refund or credit for overpaid FICA or FUTA taxes for all open tax years. Interested employers should review IRS Notice 2013-61 for instructions.
Unlike federal taxes, which were impacted by Windsor, state tax issues remain up in the air. In those states that follow the letter of federal tax law, benefits for married same-sex partners are now pre-tax. Unfortunately, some states elected not to piggyback on federal law in this area, so employers operating in those states need to bifurcate state and federal withholding and imputed income. The best approach for employers is to contact state tax agencies in each state in which they make payroll to ensure compliance. Moreover, because state laws on same-sex marriage are changing daily, wise employers will re-check this status frequently.
Welfare benefit plans
The IRS has promised guidance on how employer-sponsored welfare benefit plans should operate after Windsor, although none has been forthcoming. Welfare plans generally include arrangements such as group health, dental and vision, life insurance, AD&D coverage and employee assistance plans. Clearly, benefit plans operating under federal tax law such as cafeteria plans, health reimbursement accounts, flexible spending accounts and health savings accounts should treat validly married same-sex partners just as they treat married heterosexual partners. That means same-sex spouses can share in pre-tax benefit payments. In addition, same-sex spouses who participate in group health plans are eligible for HIPAA special enrollment rights and COBRA entitlement. Nevertheless, federal law — including the Affordable Care Act — does not require coverage of spouses in group health plans, so initial eligibility rules remain murky. To avoid confusion and employee unrest, and in anticipation of changes in many state laws dealing with same-sex marriage, a number of employers who cover spouses in their welfare plans have adopted an across-the-board policy allowing same-sex spouses to participate on the same basis as heterosexual spouses. Before doing so, however, employers with insured plans should make sure their policies cover same-sex spouses, and employers sponsoring self-insured plans should check with stop-loss insurers to verify coverage.
Family and Medical Leave Act
After Windsor, the Department of Labor stated that same-sex spouses were validly married for purposes of FMLA protections only if they lived in a state that recognizes same-sex marriage. On June 19, 2014, however, the Department of Labor (DOL) modified its position to agree with the IRS, advising that same-sex marriages performed in states that recognized them were valid under the FMLA regardless of residency. Employers should ensure that their FMLA policies are in line with the DOL’s new advice.
Prior to Windsor, many employers offered benefit plan coverage to same-sex individuals if they registered with a state as domestic partners or signed domestic partnership affidavits. In most cases, these individuals were not validly married because so few states recognized same-sex marriage at the time. Now, and until same-sex domestic partners actually wed in a state that recognizes same-sex marriage, these individuals do not have the rights of spouses. Even after Windsor, they continue to be treated as unmarried with respect to both state and federal law.