The Defense of Marriage Act (DOMA), which became law in 1996, states in part-
Section 2. Powers reserved to the states
No State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same-sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such a relationship.
Section 3. Definition of marriage
In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word "marriage" means only a legal union between one man and one woman as husband and wife, and the word "spouse" refers only to a person of the opposite-sex who is a husband or a wife.
United States v. Windsor
In United States v. Windsor, decided by the U.S. Supreme Court in June 2013, Section 3 of DOMA was declared unconstitutional. Thus, the federal government cannot fail to recognize an otherwise legal union between a same-sex couple for purposes of interpreting and applying federal law.
Section 2 of DOMA permits a state not to recognize a marriage between persons of the same-sex that would be valid under the laws of another state. After Windsor was decided there was a question as to how the federal government would treat a same-sex couple that was legally married outside the United States or in a state that permitted same-sex marriage but who resided in a state that does not, such as Florida.
The ruling also clarifies the meaning of marital terminology. The term "spouse," "husband," and "wife" include any individual married to a person of the same-sex if the individuals are lawfully married under a state law. The term does not include registered domestic partnerships, civil unions, or other similar formal relation recognized under state law. The ruling will be applied prospectively as of September 16.
IRS guidance in Revenue Ruling 2013-17
In late August 2013 the IRS issued Revenue Ruling 2013-17 (available here), which holds that for purposes of federal tax law, the federal government will treat a legally married same-sex couple as married even though they are living in a state that does not recognize same-sex marriage. It also issued guidance in the form of Questions and Answers with respect to both married same-sex couples and couples who were not married but had a civil union. It held that couples who had a civil union were not entitled to be treated as married for purposes of federal tax law.
Department of Labor guidance in Revenue Ruling 2013-17
On September 18, the DOL issued Technical Release No. 2013-04 (available here), offering guidance on the application of Windsor to employee benefit plans that are subject to ERISA. The agencies agree that a same-sex marriage that was validly entered into in a state whose laws authorized same-sex marriages should be treated the same as opposite-sex marriages for tax and ERISA purposes, even if the married couple is domiciled in or moves to a state like Florida that does not recognize the validity of same-sex marriages for state law purposes. For example, a legal marriage of a same-sex couple in the District of Columbia which recognizes and allows same-sex marriage should be recognized for federal tax and ERISA purposes even if that couple is domiciled in Florida, which does not currently recognize same-sex marriages.
Impact on retirement plans
We expect further guidance from the IRS on this subject. However, based on the Revenue Ruling 2013-17, the decision in Windsor impacts the following retirement plan situations:
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Under defined benefit plans, money purchase plans, and other defined contribution plans that offer joint and survivor annuities for a participant and spouse, a survivor benefit must be provided to the participant's spouse unless the spouse waives the right to the benefit.
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Defined contribution plans that do not offer joint and survivor annuities must provide that death benefits under the plan will be paid to the participant's surviving spouse unless waived by the spouse.
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Any defined benefit plans that permits participant loans and requires the pledge of the participant's accrued benefit to secure a loan, and any defined contribution plan that provides for a spousal survivor benefit and requires the pledge of the participant's account balance to secure a loan, must obtain the consent of the spouse to securing loan.
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On the case of a death of a participant, the surviving spouse can elect to defer permitted pension benefits until the year following the year in which the participant would have attained the age of 70½.
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In connection with a distribution of plan benefits following the death of a participant, the participant's spouse can rollover the benefits in the same manner as the participant could have if living.
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Survivors of qualified military service personnel who die while performing qualified military service are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) that would have been provided under the plan had the participant resumed employment the day before tying and then terminated employment on account of death.
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A spouse or ex-spouse of a participant is entitled to a Qualified Domestic Relations Order.
In light of these changes, all employers should prepare and distribute to participants information on the effects of the Windsor decision and should specifically note that same-sex couples should carefully review any beneficiary designation and any elections available to married participants. It is not clear whether Windsor will be retroactive in this regard. For example, if distributions were made from a defined benefit plan and a same-sex spouse was not provided with a qualified joint and survivor annuity option, what requirements are the plan and the plan's sponsor subject to?
Effect on health plans and related benefits
The potential consequences to health plans from Windsor for same-sex couples and their employers are significant and include: (i) no longer having to impute as taxable income to an employee the value of the same-sex spouse's benefit from the health plan; (ii) employees being able to pay premiums for same-sex spouse benefits on a pre-tax basis under a cafeteria plan; (iii) change in status enrollment rights under cafeteria plans for same-sex spouses; (iv) tax-free reimbursements for same-sex spouses under HSAs and HRAs; (v) COBRA rights for same-sex spouses; and (vi) rights in general to health benefits under health plans that cover spouses.
For now, it appears that Florida employers must treat validly married employees and their spouses identically for tax and ERISA purposes, regardless of whether the marriage is between members of the same or opposite sex. Curiously, the DOL has not decided to apply the Windsor case in this manner to other areas of DOL jurisdiction.
The potential significance to Florida employers include:
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The ruling insures spouses in a same-sex marriage will have the same access to a partner's pension in the event of his or her death as those in heterosexual marriages;
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Spouses in a same-sex marriage can probably divide plan assets equitably via a Qualified Domestic Relations Order upon a valid divorce;
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If an employer provides insurance coverage for spouses under a group health insurance plan, they would likely be required to provide coverage to spouses in a validly consummated same-sex marriage from another state. Furthermore, the value of coverage for same-sex couple should no longer be taxable if it otherwise complies with IRC requirements;
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Employer tax returns: if the IRS will recognize that a law that is unconstitutional today was unconstitutional yesterday, it may entertain employer refund claims for Social Security taxes and Medicare taxes paid on the amounts relating to health coverage described above (both imputed income and after tax premiums) for limitation periods that are still open. This refund could include both the employer's share and the employee's share of these taxes, and employees could file amended returns to pursue their own refund claims;
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Same-sex spouses probably have COBRA rights upon a loss of eligibility under the same terms that someone in a heterosexual marriage would have.
Retroactive tax consequences for employers and participants
The IRS guidance recognizes that individuals who were legally married but could not file joint income tax returns, or take advantage of the tax benefits available under employer provided health plans have the right to retroactively file for tax refunds, typically for the last three tax years. This should not directly involve employers.
Employers that paid payroll taxes with respect to medical benefits provided to employees who were same-sex married couples and who would have received pre-tax benefits if they had been opposite-sex married couples, can claim refunds for the excess payroll taxes paid.