The Windsor Decision & Employee Benefits: What You Should Know April 24, 2014 Jonathan D. Karelitz...

The Windsor Decision & Employee Benefits:

What You Should Know

April 24, 2014

Jonathan D. [email protected]

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Today’s Roadmap

• DOMA and the Windsor Decision

• Current Landscape Re: Same-Sex Marriages Nationwide

• Windsor’s Impact on Qualified Plans

• Windsor’s Impact on Welfare Plans

• Employer and Employee Action Steps

• Tough Questions & Need for More Guidance

Federal Defense of Marriage Act (DOMA)

Effective September 21, 1996

Section 1: Title

Section 2: Full Faith and Credit

One state does not have to recognize same-sex marriage of other states

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 or 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.”

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Impact of DOMA Section 3

No immediate impact; no states recognized same-sex marriages in 1996

Impact began in 2004

Same-sex marriage recognized in Massachusetts in 2004

At present, same-sex marriage lawful/allowed in 17 states (and the District of Columbia)

Legal impact: Same-sex couples who were legally married under state law were considered single in more than 1,000 federal laws that define “marriage” or “spouse”

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U.S. v. Windsor, 133 S. Ct. 2675 (2013)

Addressed the constitutionality of Section 3 of DOMA

The Court in a 5-4 decision held that Section 3 of DOMA violated the due process clause of the Fifth Amendment

“In determining whether a law is motivated by improper animus or purpose, discriminations of an unusual character especially require careful consideration. DOMA cannot survive under these principles."

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U.S. v Windsor

The Court held that the burden DOMA imposed on legal married same-sex couples was unconstitutional:

“DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the State has found it proper to acknowledge and protect. By this dynamic DOMA undermines both the public and private significance of state sanctioned same-sex marriages; for it tells those couples, and all the world, that their otherwise valid marriages are unworthy of federal recognition. This places same-sex couples in an unstable position of being in a second-tier marriage.”

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Impact of Windsor

Section 1: Title

Section 2: Full Faith and Credit

One state does not have to recognize same-sex marriage of other states

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 or 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.”

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Impact of Windsor

Legally married same-sex couples who live in states that recognize their marriage are eligible for more than 1,000 federal benefits that flow to married couples

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Legally married same-sex couples who live in states that do not recognize their marriage may be eligible for federal benefits that flow to married couples

What Windsor Does Not Do

Extend federal recognition to same-sex couples with civil unions or domestic partnerships

Require states to legalize same-sex marriages

Require states to recognize same-sex marriages legally performed in other jurisdictions

Require health plans to cover same-sex spouses

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States that Recognize Same-Sex Marriage in the U.S.*

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* Map shows U.S. as of April 16, 2014. Pending lawsuits are also noted.

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Windsor’s Impact on Employee Benefit Plans

Windsor: Participant with a same-sex spouse, who resides in a state that recognizes marriages between same-sex spouses, must be treated as married for purposes of federal law

IRS Rev. Rul. 2013-17: Takes Windsor a step further

Effective September 16, 2013, all lawful same-sex marriages (including those performed in foreign jurisdictions) are recognized for federal tax purposes, even if the participant lives in a state that does not recognize same-sex marriage

DOL Technical Release No. 2013-04: Agrees with IRS position in Rev. Rul. 2013-17 for benefit plan purposes

IRS Notice 2014-1: Additional IRS guidance on pre-tax elections under Section 125 cafeteria plans, flexible spending accounts (FSAs) and health savings accounts (HSAs)

IRS Notice 2014-19: Pension and 401(k) plans not required to recognize same-sex spouses during periods before June 26, 2013 to maintain tax-qualified status

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Windsor’s Impact on Qualified Plans


IRS tax qualification rules require retirement plans to apply the Windsor decision to employees with same-sex spouses beginning on June 26, 2013

If a plan’s governing documents define “spouse” by reference to DOMA, or the plan’s terms are otherwise inconsistent with the Windsor decision, plan amendments are required

If amendment is required, it generally must be adopted by December 31, 2014 (although later deadlines may apply depending on the applicable IRS remedial amendment period)

If a plan does not wish to recognize same-sex spouses before June 26, 2013, the IRS will not seek penalties or disqualification on that basis

IRS guidance does not preclude a same-sex spouse’s claim for a benefit with respect to a participant who died before June 26, 2013

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Spousal Consent to Form of Payment and Beneficiary

Defined benefit pension plans must provide Qualified Joint & Survivor Annuity (QJSA) with same-sex spouse as the beneficiary, unless the participant elects another payment form and the same-sex spouse consents

Defined contribution plans (including 401(k) plans) must pay death benefit to participant’s same-sex spouse unless same-sex spouse consents to different beneficiary

• Qualified Preretirement Survivor Annuity

• QPSA must be paid to the surviving same-sex spouse

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Default Beneficiary Rules

Default beneficiary hierarchy is generally a plan design decision

Spouse or domestic partner usually is first default beneficiary

Potential for claims by multiple parties

Example: Participant and same-sex partner live in Texas, travel to Massachusetts in 2004, get married, return to Texas. Participant and

spouse split up in 2009 but do not divorce (Texas court refuses to grant divorce to married couple of the same sex.) Participant moves

to California, designates children as beneficiaries (without consent of estranged spouse), and subsequently dies. Plan says Texas law

governs to the extent not preempted by ERISA.

Eligible Rollover Distributions

Same-sex spouse can roll over an eligible rollover distribution to another eligible retirement plan or IRA (just as opposite-sex spouse can)

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401(k) Plans: Hardship Distributions

Same-sex spouse must be treated as spouse

If plan was previously amended to allow for “designated beneficiary” hardship events, no longer necessary for a participant to designate same-sex spouse as primary beneficiary to take hardship distribution for spouse’s medical, tuition or funeral expenses

401(k) Plans: Participant Loans

Plans that require spousal consent for participant loans must now obtain consent of same-sex spouse

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Qualified Domestic Relations Orders

Must recognize QDRO dividing benefits earned during a participant’s same-sex marriage

ERISA Disclosure Requirements

Must provide certain disclosures to the same-sex spouse

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Windsor’s Impact on Welfare Plans


Self-Funded Plans

• Before Windsor: Plan sponsors had almost unfettered authority to define who is eligible for coverage

• After Windsor: Plan sponsors are still free to define who is eligible

Currently, no requirement to offer coverage to same-sex spouses, even if coverage is available to opposite-sex spouses

If a same-sex spouse is covered, that coverage will now extend to other benefits, such as COBRA and Health Reimbursement Accounts

• But, there may be some risk associated with covering only opposite-sex spouses

• No requirement to cover domestic partners or civil union partners

Insured Plans

• Coverage of same-sex spouses depends on insurance laws in state where insurance policy is issued

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Paying for Coverage on a Pre-Tax Basis

Before Windsor: Employees paid premiums for same-sex spouse’s group health plan coverage on a post-tax basis

After Windsor: Employees may pay premiums for same-sex spouse’s group health plan coverage through pre-tax payroll deductions

Income Tax Effects of Group Health Plan Coverage

Before Windsor: Employers were required to impute income to the participant for cost of same-sex spouse’s coverage

After Windsor: Employers should stop imputing income for federal tax purposes due to coverage of same-sex spouse

IRS Notice 2014-1: Employee may exclude the cost of spousal coverage from tax return and pursue refund for open tax years

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Payroll Tax Effects of Group Health Plan Coverage

Beginning September 16, 2013, employer should not withhold or pay federal payroll taxes based on imputed income for an employee who has a lawful same-sex spouse

IRS Notice 2013-61: Employer can file for refund of employer portion of federal payroll taxes (and employee portion if employee’s whereabouts are known)

o Could have filed Form 941 during Q4 2013 to request refund for payroll taxes attributable to Q1 through Q3 2013

o If Form 941 was not filed during 2013, may file Form 941-X for Q4 2013 to request refund for payroll taxes attributable to Q1 through Q4 2013

o May also file Form 941-X for Q4 2012, 2011 and 2010 to request refund for payroll taxes attributable to those years


Mid-Year Enrollment

If a group health plan has spousal coverage, the employer can permit a mid-year election to enroll new same-sex spouses and their dependent children

Transition rules for plan year including December 16, 2013 permit a mid-year election to enroll existing same-sex spouses who were previously not enrolled in the plan and their dependent children

• Election changes are effective within a reasonable period of time after December 16, 2013

• Participant can choose whether to pay for same-sex spousal coverage pre-tax or after-tax

• Revised Form W-4 is acceptable substantiation

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Health Flexible Spending Accounts, Health Savings Accounts, and Health Reimbursement Arrangements

May now reimburse medical expenses of same-sex spouse

HSAs: Annual contribution limit for married couples ($6,550 for 2014) applies for same-sex couples

Dependent Care Assistance Programs

May now reimburse dependent care expenses of:

o Same-sex spouse’s children; or

o Same-sex spouse who is incapable of caring for self

Same-sex couples treated the same as opposite-sex couples

o $5,000 annual contribution limit if filing jointly

o $2,500 per person annual contribution limit if filing jointly

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COBRA Continuation Coverage

If same-sex spouse is covered under plan, he/she is now entitled to the same COBRA continuation coverage rights as any other COBRA qualifying beneficiary

HIPAA Special Enrollment

Employee can enroll same-sex spouse mid-year and make mid-year changes (e.g., HMO plan to a PPO)

Affordable Care Act: Employer Shared Responsibility (“Pay or Play”)

Beginning January 1, 2015 (2016 for employers with 50-99 employees), must offer group health plan coverage to children of same-sex spouse (now considered “stepchildren” of the employee) to avoid potential penalties

Employer Action Steps

1. Review benefit plan definitions of “spouse” and update as necessary

2. Apply new definitions of “spouse” on a prospective basis

3. Update employee handbook, summary plan descriptions and enrollment materials

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4. Review and update beneficiary designation forms as needed

5. Communicate changes to HR staff

6. Consider filing for FICA refund (all open tax years)

Employee Action Steps

1. Get hitched

2. Get divorced

3. Notify employer of same-sex spouse

4. Change/update beneficiary designations

5. Consider filing for tax refund (all open tax years)

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Future IRS or DOL Guidance Forthcoming?

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Tough Questions

• Can a welfare plan exclude coverage for same-sex spouses?

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• Should welfare plans exclude coverage for domestic partners? Only in states where same-sex marriage is recognized?

• Can a same-sex spouse sue under ERISA for death benefits paid out to a non-spouse beneficiary prior to September 16, 2013 (effective date of IRS guidance)?

The Windsor Decision & Employee Benefits: What You Should Know April 24, 2014 Jonathan D. Karelitz...

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