When the U.S. Supreme Court in Windsor
threw the determination of same-sex marriage back to the states, one major question had to be answered. Which state law applies - the law of the state where the couple married or the state where the couple currently resides?
The IRS has now answered this question for federal tax purposes: the law of the state where the couple married (Rev. Rul. 2013-17
). This clarification, however, raises many other questions for benefits administrators. Some of these questions were answered by the IRS, while the IRS has left others to be answered later or without IRS assistance.
Must benefit plans recognize same-sex marriages sanctioned in jurisdictions other than U.S. states?
A "state" for this purpose is any jurisdiction that has the legal authority to sanction marriages. So a same-sex marriage in another country or territory must be recognized for federal law purposes related to benefits.
Should partners in civil unions or other state-sanctioned same-sex relationships short of marriage now be treated as spouses?
No. Only those married under state law must be treated as legal spouses. It is unclear whether employers may voluntarily treat civil unions as marriage. For example, a retirement plan may not be able to require a participant to obtain the consent of a civil union partner to the participant's designation of another beneficiary. Until the IRS says otherwise, the more prudent course would be to not voluntarily treat partners in civil unions as spouses. Otherwise, the plans may violate vesting, anti-alienation or other tax-qualification requirements. A plan could, however, make a civil union partner the default beneficiary if the participant fails to name anyone as beneficiary.
Today, the following states provide for same-sex marriages: California, Connecticut, Delaware, Minnesota, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, Vermont, Washington and Washington, DC.
Does this mean employers must provide the exact same benefits to same-sex couples as to opposite-sex couples?
Not necessarily. Any spousal rights under ERISA, such as rights to statutory survivor benefits or a share of a spouse's benefit upon divorce, must be provided to same-sex couples. But theoretically, an employer could offer additional benefits not required by federal law, such as medical coverage or additional death benefits, to opposite-sex couples only. The problems, however, are: (1) this will make plan administration more complicated and (2) making these distinctions may violate Title VII or state civil rights laws. If an employer wants to carve out same-sex spouses from some benefits offered to opposite-sex spouses, legal counsel should be consulted. Our general recommendation is that benefit programs treat same-sex spouses the same as opposite-sex spouses.
Do benefit plans have to be amended to reflect same-sex marriages?
It depends on the current plan language. If the plan generally defines a spouse as the person to whom the participant is legally married or who is treated as a spouse under applicable law, no change likely will be required to recognize the same-sex spouse. But if the plan specifically refers to marriage being between a man and a woman or defines spouse by reference to the Defense of Marriage Act, the plan should be amended. The plan may also have to be amended if any plan benefits are intended to be restricted to opposite-sex spouses. Depending on the change, employers may need to amend plans immediately. Plans may also need retroactive amendments - the IRS will be issuing additional guidance on the extent to which retroactive amendments will be allowed and the timeframe for adoption. In the meantime, you should review your plan language, administrative processes, handbooks and other policies for any changes that may be required.
How will the employer know if an employee in a same-sex relationship has been married in another state?
The employer will determine whether a participant has been married in another state in the same manner as opposite-sex marriages are currently determined, such as by obtaining a copy of the marriage license. Because same-sex spousal rights are new, though, we suggest that employers communicate the changes to employees and ask them to disclose any spouses not previously identified.
Are church plans and state governmental plans subject to these rules?
Probably not, with respect to most retirement plan requirements. Because church and governmental plans are exempt from both ERISA and the tax-qualification requirements regarding spousal rights, these plans should not be required to treat same-sex spouses as spouses for these purposes. A same-sex spouse would have to be treated as a spouse under certain distribution rules, however, such as spousal roll-over rights and withholding on periodic distributions.
May employees treat this new rule as a status change and allow mid-year cafeteria plan elections?
Although the IRS has not specifically opined on this issue, we believe that mid-year cafeteria elections are permissible on account of a status change if the health and welfare plan did not recognize same-sex spouses as spouses eligible for coverage before Windsor
but does at any time after the decision. Couples who marry after the Windsor
decision will also now qualify for HIPAA special enrollment rights if the health plan provides coverage for same-sex spouses.
When do we have to start implementing this change?
The IRS ruling is generally effective September 16, 2013. Any new actions, such as beneficiary designations, participant elections requiring spousal consent, required minimum distributions, QDRO approvals, hardship distributions, COBRA, HIPAA special enrollment, etc., after that date must take into account a same-sex spouse as a spouse, whether or not the state of employment or residence recognizes same-sex marriage. The IRS is expected to issue further guidance on how actions taken before that date should be treated, such as whether an earlier non-spouse beneficiary designation will require a new designation and spouse consent. It is presently unclear whether the employer will be responsible for having paid death benefits to a non-spouse beneficiary or paid retirement annuities in a form other than a joint & survivor annuity.
Participants, however, can rely on this ruling for tax purposes as long as the statute of limitations has not yet run (generally three years from filing). For example, if the participant has paid income taxes on health plan coverage of a same-sex spouse, the participant may amend his or her return and claim a refund for any open periods, as long as the return is amended throughout to reflect married status.
Employers may seek refunds of the employer share of FICA taxes paid on same-sex spouse benefits that were treated as subject to FICA, but only with respect to open periods. The IRS will be providing specific administrative procedures for claiming these refunds.
If you have questions about federal tax law as it applies to same-sex couples, please contact Mary Jo Larson (email@example.com
or 248.784.5183) or another member of the Employee Benefits/Executive Compensation Practice Group at Warner Norcross & Judd.