The Verdict on DOMA and Proposition 8: Impact on Employee Benefit Plans
Today the United States Supreme Court overturned Section 3 of the Defense of Marriage Act ("DOMA") and reinstated a California judge's order that Proposition 8 (the California ballot initiative defining marriage as between a man and a woman) is unconstitutional. Although it will take time to sort through the implications of these rulings (which depend somewhat on how they are interpreted by the federal government and individual states), they undoubtedly will have a substantial impact on employer-sponsored benefit plans.
What the Rulings Do
Section 3 of DOMA defines the words "marriage" and "spouse," for federal purposes, as referring only to marriages between opposite-sex couples. As a result of DOMA, the legal marriages of same-sex couples were not recognized under any federal law, including the Internal Revenue Code and ERISA. This treatment of same-sex spouses as unmarried individuals had far reaching implications in the context of employee benefits and federal income taxation.
As a result of today's ruling in United States v. Windsor, any federal statute that refers to a "marriage" or a "spouse" must be interpreted as applying with equal force to same-sex married couples, and same-sex couples who are legally married must now be treated the same under federal law as opposite-sex married couples. It is certain these changes apply to same-sex married couples who live in states that recognize same-sex marriage; it remains to be seen how they will apply to same-sex married couples who come to live in states that do not recognize such marriages.
There will be significant ramifications for employer-sponsored benefit plans in states where same-sex marriages are affected by the ruling:
- Same-sex married couples will no longer have to pay federal income tax on the value of employer-sponsored health coverage for a same-sex spouse or the child of a same-sex spouse. Therefore, employers in these states will no longer have to maintain separate payroll slots for benefits provided to same-sex spouses.
- Same-sex spouses will be recognized as spouses under COBRA and HIPAA, with continuation of health coverage and special enrollment rights.
- Participants may be reimbursed for the medical expenses of their same-sex spouses under health flexible spending accounts and other tax-favored arrangements.
- Qualified retirement plans must offer pre- and post-retirement spousal rights and benefits to same-sex spouses, including automatic forms of payment and qualified domestic relations orders. Surviving same-sex spouses will receive the advantages of more favorable beneficiary payment and rollover rules.
- Employers must allow employees in a same-sex marriage to take time off under the Family and Medical Leave Act ("FMLA") to care for a same-sex spouse in the event of the spouse's illness.
As for the California case, Hollingsworth v. Perry, the Supreme Court reinstated a California judge's order allowing same-sex couples to marry. (Recall that same-sex marriage was legal in California for a brief time, between June 17 and November 4, 2008.) At the moment it is unclear whether the ruling applies just to the parties or to the entire state of California and the timing for implementing the decision remains uncertain.
What the Rulings Do Not Do
Today's rulings do not invalidate state laws or state constitutional provisions that prohibit same-sex marriage, nor require all states to allow or recognize same-sex marriages. (Indeed, Section 2 of DOMA, which gives states the power to make decisions about whether to respect same-sex marriages performed in other states, remains intact.) The rulings also do not require all employer-sponsored benefit plans to provide benefits for same-sex spouses. All they require is that the federal government treat same-sex couples who are legally married under applicable state law the same as opposite-sex married couples for all purposes under federal law.
Practical Implications for Employer Plans
On the welfare side, today's rulings should have little impact on the design of fully insured health plans, which remain subject to state insurance law mandates. The impact on self-funded plans remains to be seen, because federal law does not expressly require that employers extend spousal benefits to all spouses, and ERISA preempts the application of state discrimination and benefit laws. That said, employers who provide coverage only for opposite-sex spouses may be at risk for lawsuits under federal discrimination law.
On the retirement side, plans will be required to determine marital status under applicable state law for determining surviving spouse annuities and death benefits and for the spousal consent rules, and same-sex spouses will be able to take spousal rollover distributions. Furthermore, qualified domestic relations orders ("QDROs") providing benefits for same-sex spouses will be valid.
One final note. Today's rulings prompt more questions than they answer, so the final effect on employers, employees, and benefits plans is not yet clear. For example, will a same-sex couple married in Maine be able to file a joint federal income tax return if they move to a state not recognizing same-sex marriage? If an employer transfers a same-sex married employee from Massachusetts to a facility in a state not recognizing same-sex marriage, does that employee cease to be married under federal benefits law as a result of the transfer? Does the California ruling apply only to the named parties or extend to all same-sex couples in that state? How quickly will employers need to act to bring their plans and practices in line with the rulings? There will be much more to say about these issues as the Executive Branch and the courts interpret and implement these decisions. We will be returning to this subject in the coming weeks and months as we receive guidance on these rulings.
Thanks to Nora Lawrence, a summer Associate at Verrill Dana, for her efforts in producing this post. Nora will enter her third year of law school in the fall and, in the meantime, is enjoying her summer in Portland.