This guest post is authored by Keith McMurdy. It originally appeared on June 26 on Keith’s Employee Benefits Legal Blog. Keith is a Partner in Fox’s Employee Benefits and Compensation Planning Practice and can be reached at email@example.com or 212.878.7919.
Today the Supreme Court ruled that the federal Defense of Marriage Act is unconstitutional. How this will ultimately play out remains to be seen, but from a benefit plan perspective, it is important to consider some initial concerns.
From a benefit perspective, the DOMA basically required that the term “spouse,” when used in the Code or ERISA, meant exclusively someone of the opposite gender to whom you are legally married. So even same-sex marriages that occurred in states that recognized same-sex marriage, for benefits purposes, that marriage did not create a spousal relationship. The net result is that when an ERISA qualified plan used the term “spouse,” it would not legally include same-sex partners. Many plans decided on their own to include same-sex partners in their definition of “spouse,” but this created a tax problem. Since employee benefits provided in a qualified plan are not generally considered as “compensation” for tax purposes, that portion of benefits provided to same-sex partners is treated as compensation for federal tax purposes. So employers have to report the value of the benefit provided to the same-sex partner on the W-2 of the employee spouse.
With the defense of marriage act removed, this issue of taxation under the federal scheme may now be resolved. A plan that defines spouse as including a same-sex partner can treat the entire benefit as a non-taxable event. But it also brings into focus some specifics not previously considered. For example, spouses generally have a right to distributions from an employees retirement plan (say a 401(k) for example) and spousal waivers are required to make someone other than a spouse the designated beneficiary for that plan. Now, every plan that is subject to spousal restrictions (most commonly retirement plans) conceivably has to consider the same-sex spouse as a default beneficiary and apply the spousal waiver rules. This may require plan administrators to change how they approach administrations of plan.
Finally, there is the question of how to administer benefits for same-sex partners married in a state that recognizes same-sex unions, but the plan and plan sponsor are in a state that does not. On this issue, the Supreme Court’s decision in not clear as to whether the definition of spouse in an employee benefit plan can be limited based on the state where the plan is domiciled. The federal tax issue may be somewhat resolved, but the eligibility and application to benefit plans generally remains somewhat muddled. So it would be inappropriate at this stage to say all plans must now cover same-sex spouses regardless of what state the plan is in. However, if your plan does define “spouse” as including same-sex partners, it does initially appear that the opinion makes it easier to manage your plans for taxation purposes.
I am sure this will not be the last we hear of this issue and more will come from this decision so stayed tuned. And if you feel the need to make immediate changes, step back and wait until the dust settles.