SUPREME COURT RULES ON SAME-SEX MARRIAGE AND DOMA: STILL WAITING FOR GUIDANCE

Transcription

1 ALERT Willlis Huma Capital Practice SUPREME COURT RULES ON SAME-SEX MARRIAGE AND DOMA: STILL WAITING FOR GUIDANCE O Jue 26, 2013, the Uited States Supreme Court ruled i a 5-4 decisio that 3 of the Defese of Marriage Act (DOMA) was ucostitutioal uder the Fifth Amedmet of the Uited States Costitutio. Sectio 3 of DOMA affects more tha 1,000 federal laws, icludig those related to estate ad gift taxes, Social Security beefits ad tax retur filigs. Its effect o the Iteral Reveue Code (IRC) ad the Employee Retiremet Icome Security Act of 1974 (ERISA) will have a sigificat impact o employers ad employer-sposored plas. I the days ad weeks followig the decisio, may experts asserted that employers must (or must ot) take various actios immediately. Addig to the cofusio, less tha a week after the Supreme Court s decisio, the Treasury Departmet s blog oted plas to delay the employer pay or play excise tax util 2015 (the Treasury later issued guidace cofirmig this delay). All of which left employers ad their advisers with may questios to mull over. With the dust fially settlig, it appears that employers may be best served by waitig for guidace from the federal agecies that eforce the laws affected by DOMA. This Alert discusses why this is so. BACKGROUND ON DOMA I 1996, Presidet Clito (D) siged ito law DOMA. Sectio 3 of DOMA defied marriage for all federal law purposes as a uio betwee oe ma ad oe woma; the term spouse referred oly to a perso of the opposite sex who is a husbad or a wife. Uder the law, the federal govermet did ot recogize same-sex marriages for ay legal purpose. Idividuals i same-sex marriages were, therefore, barred from ejoyig those federal marital beefits afforded to idividuals i opposite-sex marriages. These beefits iclude, for example, receivig employersposored health beefits o a tax-free basis ad the right to cotiue health coverage uder COBRA. DOMA s defiitio of spouse meat that if a employer chose to exted health beefit eligibility to same-sex spouses (or domestic or civil uio parters), the employee would be subject to federal icome tax o the value of such beefits, assumig the idividual did ot qualify as a tax depedet for such purposes. DOMA, specifically 2, also grats states the authority to refuse to recogize same-sex marriages, icludig those that have bee performed i, ad recogized by, other states. This sectio of DOMA was ot challeged i the case decided by the Court ad remais federal law. Thirtee states ad the District of Columbia curretly permit samesex marriage Califoria, Coecticut, Delaware, Iowa, Maie, Marylad, Massachusetts, Miesota, New Hampshire, New York, Rhode Islad, Vermot ad Washigto. Several states recogize similar types of relatioships, such as civil uios ad domestic parterships, although the Supreme Court s decisio i Uited States v. Widsor does ot specifically apply to these types of relatioships. However, may states do ot recogize same-sex marriage or cofer ay special status upo these types of relatioships.

2 SUPREME COURT S DECISION IN WINDSOR Uited States v. Widsor ivolved a same-sex couple, Edith Widsor ad Thea Spyer, married i Caada i 2007 ad residig i New York, a state that recogizes same-sex marriage. Whe Ms. Spyer died i 2010, she left her etire estate to her spouse. Ms. Widsor, however, was barred from claimig the federal estate tax exemptio for survivig spouses due to 3 of DOMA. Ms. Widsor paid the tax bill ad sought a refud, which the Iteral Reveue Service (IRS) deied. She the brought suit challegig the costitutioality of 3 of DOMA. Both the Uited States District Court ad the U.S. Court of Appeals for the Secod Circuit Court of Appeals held that this sectio of DOMA is ucostitutioal ad ordered the U.S. to pay a refud. The U.S. Supreme Court affirmed the holdig of the appeals court. HOW THE RULING AFFECTS EMPLOYER-SPONSORED HEALTH BENEFITS Federal laws, such as the IRC, ERISA ad COBRA, use the terms spouse ad marriage to defie ad explai who is specifically etitled to the rights ad beefits grated uder those laws. With the Court s rulig that DOMA s defiitio of marriage is ucostitutioal, these terms are o loger limited to opposite-sex spouses. The Court s opiio appeared to limit itself to those same-sex marriages made lawful by the State, but this does othig to clarify which same-sex marriages are recogized ad for what purposes. This meas, for example, that some but possibly ot all same-sex spouses could ow meet the COBRA defiitio of a qualified beeficiary ad have a idepedet right to elect ad maitai COBRA (a right opposite-sex spouses already ejoy). The Court s rulig does ot aswer the may questios that employers have, particularly whe it comes to determiig who exactly is a same-sex spouse ad therefore etitled to federal beefits. Such questios as: Will the federal agecies limit themselves to just same-sex marriage or will they exted rights ad beefits to civil uios or domestic parterships (e.g., spousal equivalet laws)? Must the same-sex spouses reside i a state that recogizes same-sex marriage to be etitled to federal beefits or is it sufficiet that they have bee legally married i a state that allows such marriages (state of residece vs. state of celebratio )? Will the agecies exted federal beefits retroactively ad, if so, what does a employer eed to do to address? Must employers exted beefits to same-sex spouses or ca they choose to exclude them? What will happe i states that do ot specifically recogize same-sex marriage but where the state tax code coforms to federal icome tax law? While same-sex spouses residig i a state that recogizes same-sex marriage may be clearly etitled to federal beefits, util the employer kows how the relevat agecies are aswerig these questios, ay chages they make are likely to be over- or uder-iclusive, ad will eed to be repeated or, worse, corrected after the fact. A employer also rus cosiderable risk if it guesses wrog. For example, a employer who adjusts its payroll to allow same-sex spouses to participate i its cafeteria pla ad pay for coverage o a pre-tax basis ad ceases to impute icome o the value of the beefits provided to such same-sex spouses may have to go through this process agai if federal regulatory agecies determie that ay same-sex couple legally married i a state that allows for such marriages, regardless of where they reside, is also etitled to federal beefits. Not oly would there be the admiistratio issues to cosider, but the employer could be puttig its pla at risk for disqualificatio if it exteds tax beefits to idividuals who are ot etitled to them. 2 Willis North America 8/13

3 NEXT STEPS While we wait for agecy guidace o the may issues raised by the Supreme Court s rulig o DOMA, it is importat for employers to take the time to study what these chages could mea for them ad their beefit plas. STEP ONE: KNOW WHAT YOU HAVE Employers should have a clear uderstadig of what their pla curretly provides ad how they have iterpreted ad applied those provisios i the past. The Supreme Court s rulig, sice it dealt with the defiitios of spouse ad marriage, highlights the importace of clearly worded eligibility i pla documets. Some employers may fid that whe it comes to the issue of same-sex spouses, their curret eligibility is too vague, or the subject is ot addressed at all. A pla that covers spouses by referecig state law, uses the term legal spouse or that does ot defie the term spouse at all, could automatically be deemed to cover same-sex spouses, eve if that is ot the employer s itet. Employers that curretly exclude same-sex spouses will eed to review the terms of their pla, particularly if they referece DOMA ad its defiitio of marriage. Furthermore, employers may ot kow if someoe they are coverig qualifies as a same-sex spouse. Eve if the employer curretly exteds coverage to domestic parters ad same-sex spouses, it may ot have differetiated betwee same-sex spouses ad other spousal-equivalet relatioships whe it comes to the admiistratio of their beefit plas. Chages to the employer s curret processes may be ecessary to capture this iformatio. STEP TWO: KNOW WHAT YOU WANT Employers should have a clear idea as to whom they wish to cover uder their beefit plas ad should aalyze their curret beefit eligibility to determie if the terms of the pla are i agreemet with that decisio. For example, do the curret terms of the pla exted eligibility (by desig or default) to the followig idividuals (ad is this the employer s itet)? Commo law spouses Legally separated spouses Spouses eligible for coverage through their ow employer s pla Step-childre Childre for whom the employee is a legal guardia Gradchildre A employer caot realistically begi the pla amedmet process util it kows who it wats or eeds to cover. May employers are curretly poderig the beefit eligibility issue i light of health care reform ad its may requiremets. Uder the employer pay or play madate, large employers those with 50 or more fulltime employees (geerally coutig part-time employees as fractios) may icur a pealty tax uless they meet stadards for offerig health coverage to their full-time employees. Specifically, o employer will icur the pealty tax if it offers its full-time employees ad those employees depedets miimum essetial coverage ad, with respect to the full-time employees, the coverage is affordable ad provides miimum value. While the health care reform law geerally defies a full-time employee as beig employed for a average of at least 30 hours of service per week, the employer may curretly have a differet defiitio or have certai classificatios of employees that are excluded regardless of the umber of hours worked i a week (e.g., temporary or seasoal). The pay or play excise taxes require coverage for full-time employees ad their depedets, but the term depedets does ot iclude spouses. The pay or play excise tax was set to become effective for coverage provided durig 2014, but the IRS aouced a delay of the pay or play pealties ad related iformatio reportig requiremets util 2015 (other requiremets uder the health care reform law that are effective i 2014 are ot affected). As employers aticipate implemetig whatever guidace is comig from federal agecies regardig the DOMA decisio ad prepare to comply with health care reform provisios other tha pay or play, the pay or play delay is particularly welcome. 3 Willis North America 8/13

4 STEP 3: WAIT FOR GUIDANCE While the rulig has geerated may employee questios regardig their employer-sposored health beefits ad has resulted i employees demadig immediate chages, employers must approach the issue carefully ad thoughtfully. Actig immediately, such as amedig the employer s pla to iclude or exclude same-sex spouses ad chagig curret payroll processes to stop reportig imputed icome, without havig the ecessary guidace, could result i havig to udo or redo chages oce the agecies release guidace. CONCLUSION The full implicatios of this decisio ad its effect o employers ad employer-sposored plas are uclear. Additioal guidace from the IRS ad other regulatory agecies is eeded. Employers should cosult with their tax advisers ad legal cousel before chagig their beefit plas i respose to the rulig. The Natioal Legal & Research Group will cotiue to provide updates o guidace, as it becomes available. 4 Willis North America 8/13

5 KEY CONTACTS U.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONS NEW ENGLAND Aubur, ME Bagor, ME Bosto, MA Burligto, VT Hartford, CT Machester, NH Portlad, ME Shelto, CT NORTHEAST Buffalo, NY Morristow, NJ Mt. Laurel, NJ New York, NY Norwalk, CT Rador, PA Wilmigto, DE ATLANTIC Baltimore, MD Koxville, TN Memphis, TN Metro DC Nashville, TN Norfolk, VA Resto, VA Richmod, VA Rockville, MD SOUTHEAST Atlata, GA Birmigham, AL Charlotte, NC Gaiesville, FL Greeville, SC Jacksoville, FL Marietta, GA Miami, FL Mobile, AL Orlado, FL Raleigh, NC Savaah, GA Tallahassee, FL Tampa, FL Vero Beach, FL MIDWEST Appleto, WI Chicago, IL Clevelad, OH Columbus, OH Detroit, MI Grad Rapids, MI Willis North America

6 Milwaukee, WI Mieapolis, MN Molie, IL Pittsburgh, PA Schaumburg, IL SOUTH CENTRAL Amarillo, TX Austi, TX Dallas, TX Dever, CO Housto, TX McAlle, TX Mills, WY New Orleas, LA WESTERN Freso, CA Irvie, CA Las Vegas, NV Los Ageles, CA Phoeix, AZ Portlad, OR Racho/Irvie, CA Sa Diego, CA Sa Fracisco, CA Sa Jose, CA Seattle, WA The iformatio cotaied i this publicatio is ot iteded to represet legal or tax advice ad has bee prepared solely for educatioal purposes. You may wish to cosult your attorey or tax adviser regardig issues raised i this publicatio. Oklahoma City, OK Overlad Park, KS Sa Atoio, TX Wichita, KS Willis North America