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By Kristin Casler, featuring John Balitis of Fennemore Craig
When the U.S. Supreme Court decided Obergefell v. Hodges in June, it put to rest the question of whether gays and lesbians have the Constitutional right to marry. But that decision and the high court’s 2013 holding in United States v. Windsor, recognizing same-sex marriages under federal law, left a lot of work to be done by employers trying to determine their impact and to institute changes—some of them required and some prophylactic. It is up to employers to evaluate a broad spectrum of benefits in light of the rulings.
The Supreme Court in Windsor found that a key provision of the federal Defense of Marriage Act (DOMA) violated the due process and equal protection clauses of the U.S. Constitution. DOMA defined “marriage” to include only a legal union between and man and a woman; a “spouse” included only a “person of the opposite sex who is a husband or a wife.”
Implications for Retirement Benefits John Balitis, chair of the Employment and Labor Relations Practice Group at Fennemore Craig, said Windsor has had significant impacts. Individuals in same-sex marriages gained access to federal benefits and protections that previously were available only to individuals in opposite-sex marriages. These benefits consist of tax, military, immigration and federal employment benefits, including Family and Medical Leave Act (FMLA) benefits for eligible employees. The Windsor holding, and subsequent guidance from the Internal Revenue Service—particularly guidance requiring same-sex marriage recognition for all federal tax purposes, including estate and gift taxes, income taxes and qualified plan purposes, regardless of whether the same-sex couple resides in a state that recognizes same-sex marriages—confirm that both same-sex and opposite-sex spouses must be treated as “spouses” for purposes of the IRS code and other federal statutes.
Given the previous impact of Windsor, 401(k) and other qualified retirement plans generally are not impacted by Overgefell. Nonetheless, Balitis said, employers may need to ensure that their plans comply with Overgefell and applicable rules, including those regarding plan funding, minimum required distributions, eligible rollover distributions, beneficiary designations, qualified joint and survivor annuities (QJSAs), qualified domestic relations orders (QDROs), qualified pre-retirement survivor annuities (QPSAs), plan loans and hardship withdrawals.
Implications for Health and Welfare Benefits Unlike qualified retirement plans, the terms of health and other welfare benefit plans generally are not governed by the IRS Code and, as a result, are not specifically impacted by Windsor. Likewise, neither Windsor nor Overgefell expressly requires employers to provide comparable benefits to same-sex spouses. The Overgefell holding is limited to whether gays and lesbians have a fundamental, Constitutional “right to marry,” Balitis said. The Supreme Court did not find that laws discriminating on the basis of sexual orientation are entitled to any sort of heightened scrutiny. “As a result, Overgefell does not technically require employers to treat the same-sex spouses of their employees the same as opposite-sex spouses with respect to the provision of health and welfare benefits.”
This means employers are generally free to decide whether to offer medical coverage (or any other welfare benefits) to their employees’ same-sex spouses. In any event, following the Windsor decision, many employers elected to do just that, and provided equal benefits to the same-sex spouses of their workers in order to lessen the administrative burdens of providing domestic partner benefits, Balitis said.
“Nevertheless, Overgefell should prompt employers to review their welfare benefit plans’ spousal benefits in light of potential discrimination claims that could be extrapolated from the decision,” he said.
For example, even though the Supreme Court has yet to address whether offering health coverage only to opposite-sex spouses constitutes impermissible discrimination, some state laws may prohibit employers from discriminating in this way, Balitis cautioned. Although ERISA likely would preempt the application of such lawsuits to a self-funded health plan sponsored by private employers, an employer facing such an action, regardless of its merit, certainly will have to invest significant time and money defending against it. Employers operating in states with these sorts of anti-discrimination laws may elect to offer spousal benefits to their employees’ same-sex spouses simply to avoid potential claims.
Tax Implications Obergefell further underscores Windsor’s effect on programs and plans governed by the IRS Code, Balitis said. As a result of the Supreme Court’s ruling in Windsor, both same-sex spouses and opposite-sex spouses must be treated as “spouses” for purposes of the Code and other federal laws. Accordingly, employers must treat same-sex spouses and opposite-sex spouses equally with respect to survivor benefits under qualified retirement plans.
“State income tax laws now will be required to recognize the marital status of same-sex spouses, particularly for plan benefits and distributions,” he said. “Employers should review their payroll procedures with regard to taxation to ensure proper federal and state tax treatment in relation to same-sex spouses for all benefits offered.”
Down The Road Arguments may develop that other spousal benefits need to extend to employees’ same-sex spouses, including group rates for insurance plans, such as life insurance, long-term care coverage, homeowners’ insurance and automobile coverage, as well as other fringe benefits, such as bereavement and other types of leave, relocation expenses, tuition reimbursement, employee discounts, worker assistance programs and retirement planning services.
As a result, employers should review their benefit plans to confirm their compliance with the Overgefell ruling that same-sex marriages must be recognized in every state, Balitis said. Businesses may need to update plan documents and procedures to verify equal treatment of opposite- and same-sex marital status. Employers should work with third parties, including insurers or vendors, to determine whether modifications are required for compliance, and must communicate any changes, and a schedule for implementation, to plan participants. Employers also should take note of state and local law, including equal benefits ordinances and discrimination laws, when reviewing benefits schemes.
As employers sift through myriad plans and documents, they’ll need to keep their eye on the horizon. There’s no telling when or from where the next guidelines or regulatory/legal developments will come.