Benefit Changes Ahead After DOMA Ruling

The case was brought by New York resident Edie Windsor, who was married in Canada in 2007 to her partner, Thea Spyer, who died two years later. Following Spyer’s death, the federal government, under DOMA, denied Windsor the estate tax exemption available to surviving spouses. Windsor filed a lawsuit challenging the constitutionality of DOMA and seeking a refund of the estate taxes she was forced to pay as a result of the federal government’s refusal to recognize her marriage.   

“The federal statute is invalid, for no legitimate purpose overcomes the purpose and effect to disparage and injure those whom the State, by its marriage laws, sought to protect in personhood and dignity,” Justice Anthony Kennedy wrote for the majority in the court’s 5-4 decision. “By seeking to displace this protection and treating those persons as living in marriages less respected than others, the federal statute is in violation of the Fifth Amendment.”  

In a separate 5-4 opinion, the Supreme Court found that proponents of California’s Proposition 8 lacked the legal standing necessary to challenge the rights of gays and lesbians to marry. The decision lets stand a district court ruling that found Proposition 8 unconstitutional. “Because we find that petitioners do not have standing, we have no authority to decide this case on the merits, and neither did the Ninth Circuit,” the opinion says.  “We have never before upheld the standing of a private party to defend the constitutionality of a state statute when state officials have chosen not to. We decline to do so for the first time here.”  

In a statement, ERISA Industry Committee (ERIC) President Scott Macey said: “Today’s rulings by the U.S. Supreme Court could have a significant impact on the way employee benefit plans are administered.  Companies will need to carefully evaluate their plans in light of these decisions.”  

“ERIC is concerned about the ability of companies that operate nationwide to administer their plans in a uniform manner. The Employee Retirement Income Security Act of 1974 was structured to allow employers of all sizes to maintain and offer health and retirement benefits under a single set of rules regardless of where they do business or how many states their employees and retirees reside in.Some possible uncertainties left by the court’s decisions could adversely impact the administration of employer-sponsored benefit plans if it results in having to comply with overlapping and inconsistent state laws,” Macey concluded.    

Todd Solomon, Employee Benefits partner at McDermott Will & Emery LLP, told PLANSPONSOR the ruling immediately changes the law. “There is no doubt it is deemed to be effective now,” he said.    

Employers will need to move fast; however, it is understood that it will take time to implement benefit and payroll changes, and there are still unanswered questions, according to Solomon. He expects that, absent Internal Revenue Service (IRS) remedial guidance, changes will be in place by the end of this calendar year.    

It is still not known whether the change in the tax treatment of same-sex spouse benefits will be retroactive, but the biggest unanswered question, according to Solomon, is how does this affect spouses who are legally married in a state where it is authorized, but who live (and work) in state where it is not legal? He pointed out, for example, that it is easy in New York, where same-sex marriage is legal, because the employer knows same-sex spouses are entitled to the same benefit rights. But, if an employee was married in New York to a same-sex spouse but works in Florida, there is a question of which state law the employer would need to apply. “There is no obvious answer at this point,” Solomon said.   

He added that most likely clarification of these issues will come from the IRS. It is possible the president could issue an executive order that includes clarification, but Solomon does not expect that will be the case. If the high court decision applies retroactively, employers may want to apply for tax refunds, and employees may too. One issue is clear: The ruling applies only to legally married couples, not to domestic partners or those who in a civil union.

In addition to the recognition of tax-exempt spousal coverage under a health plan and the right to a qualified joint and survivor annuity (QJSA) under a pension plan, the ruling will affect qualified domestic relation orders (QDROs) that can be used to award spousal retirement benefits, beneficiary status of same-sex spouses under benefit plans, health plan eligibility under self-insured plans, and COBRA rights.  

For now, employers can stop taxing benefits in states where same-sex marriage is recognized, Solomon said. Employers in states where it is not recognized must decide what they will do, whether to continue to tax or not. Employers also need to determine what coverage is now legally required and do side-by-side comparison of what they currently offer and what they are now legally required to offer. They need to decide what plan documents will need to be amended.  

Solomon suggested employers document all decisions about changes to benefits.  

The American Benefits Council applauded the decision, noting that it was the only national employee benefits business association to join 277 employers, organizations and municipalities in filing an amicus (friend-of-the-court) brief with the Supreme Court in the case of United States v. Windsor. The brief’s argument centered on how DOMA “requires that employers treat one employee differently from another, when each is married, and each marriage is equally lawful.”  

“DOMA imposed unequal federal tax treatment on workers covered by employer-sponsored benefit plans and burdens on plan sponsors.Many more employers can now focus on providing benefits in a way that helps them achieve their core business goals,” American Benefits Council President James A. Klein said in a statement.