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Impact of the DOMA Decision on Employee Benefit Plans

Mary Komornicka, CEBSAttorney, Larkin, Hoffman, Daly & LindgrenMinneapolis, Minnesota

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Agenda

• Background• Decision• Status of the various states • Benefit Plan Specifics• Next Steps• Issues• Unknowns

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Currently Offer Same-Sex Benefits

0%

20%

40%

60%

80%

500- 999 1,000 -4,999

5,000 -9,999

10,000 -19,999

20,000+Mercer 2012 Survey

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Defense of Marriage ActSection 2 –“No State…shall be required to give effect to any public act.. Of any other State… respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State…”

Section 3 –Federal law does not recognize same-sex marriage“In determining the meaning of any Act of Congress, or of an ruling, regulation…of the various administrative [federal] agencies, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife…”

In 1996, no state expressly permitted same-sex marriage

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United States v. Windsor• Estate tax challenge

– Edith Windsor’s wife, Thea Spyer, died in 2009– Windsor was barred by Sec. 3 of DOMA from

claiming federal estate tax exemption—owed over $350,000

• Pres. Obama decided not to defend DOMA,finding it unconstitutional, but continued to enforce it

• Congressional Republicans chose to defend it – Bipartisan Legal Advisory Group (BLAG)– Decided June 26, 2013 (5-4 decision)

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United States v. Windsor Decision

• Section 3 of DOMA was “unconstitutional as a deprivation of the liberty of the person protected bythe Fifth Amendment of the Constitution.”– Equal protection element of due process

guarantee– Emphasized that this interfered with

traditional power of states to define marriage• Section 2 was not addressed

– Still stands

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Effective Date of Decisions

Effective Date of Decisions– Supreme Court decisions become

final 25 days after announcement of decision—July 21, 2013

• Question:– What is the effective date of any

change for benefit plans?

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Impact of Decision

• Applies to federal laws (over 1,000) that use “marriage” (or similar words)—“persons who are joined in same-sex marriages made lawful by the State.”

• Question:– “State of ceremony” or “State of residency”– What about domestic partnerships and civil

unions?

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Same Sex Marriage Status by State1. States permitting same-sex marriage (13 plus DC)

CA; CN; DE; DC; IO; ME; MD; MA; MN; NH; NY; RI; VT; WA

2. States with Domestic Partnerships/Civil Unions (7)CO; HI; IL; NV; NJ;OR; WI

3. States not permitting & not recognizing same-sex marriage (29)AL; AK; AZ; AR; FL; GA; IA; IN; KA; KY; LS; MI; MS; MO; MT; NE; NC; ND; OH; OK; PA; SC; SD; TN; TX; UT; VA; WV; WY

4. States not permitting but recognizing same-sex marriage (1) depends on the county

NM

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Revenue Ruling 2013-17

State of Ceremony• Logic

– Mobile society, need uniform rule– Administrative issues for employee

benefit plans if selected “state of residency”

– “State of residency” would create problems for married, living in different states

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Revenue Ruling 2013-17

• Requires marriage• Domestic Partnerships and civil

unions will not be treated as a “married couple” by IRS

• Silent on “common law” same-sex marriages

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Revenue Ruling 2013-17

Effective prospectively—Sept. 16, 2013Retroactive aspects:Filing amended tax returnsNo mention of required benefit adjustments Further guidance to come

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Benefit Plans

• Health Plans• Cafeteria/Flex plans• Retirement Plans• Other Plans

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Health Plans

• Same-sex spouse can be covered on same tax-free basis as opposite-sex spouse are covered

• Step-children of same-sex spouse are considered dependents

• ACA– Same-sex spouse’s income is included in

family income to determine eligibility for subsidy

– Included in family on state exchanges, where same-sex marriages are recognized

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HIPAA and HSA‘s

• HIPAA Special Enrollment– Permits spouse to enroll in other

spouse’s health plan upon loss of coverage under another plan

– Would now apply to same-sex spouse• HSA

– Same-sex spouse is now family– Maximum contribution to HSA applies

• Family—$6,450• Single—$3,250

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COBRA

• Same-sex spouse eligible for COBRA coverage on same basis as opposite-sex spouse

• Step-children are eligible• May want/need to offer coverage for spouse of

any individual currently on COBRA – From Sept 16?– Retroactive to start of COBRA ?

• All past premiums due

– Check with insurance carrier/stop-loss carrier

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Flexible Spending Accounts

• FSA—Medical – No imputation of income for use of

pre-tax dollars to pay for health, dental and vision coverage or medical expenses of same-sex spouse on federal level

– Effective Sept. 16?– Still have different state income tax

issues

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Flexible Spending Accounts

• FSA–Dependent Care– Can use Dependent Care dollars for

step-children– Can use Dependent Care dollars for

care of disabled same-sex spouse– Cannot use Dependent Care dollars

to pay same-sex spouse for care of children

– Subject to family limit of $5,000

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Flexible Spending Accounts

Question:Is the Windsor decision a

change in status?

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Retirement Plans

• Beneficiary Designations– Need spousal approval for anyone

other than spouse• Possible issues—

– Do you know if there is a “same-sex spouse?

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O’Conner v. Tobits 7/29/13

• Facts:– Farley & Tobits married in Canada 2006– Farley lived in Illinois– Employer located in Pennsylvania– Farley died 9/13/2010

• 9/12/2010 named parents as beneficiary, no spousal waiver

– Parents and Tobits file for benefits• Interpleader action

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O’Conner v. Tobits

• Court finds Tobits to be the spouse• ERISA enacted to establish national

uniformity• Illinois probate court recognized

spousal status of Tobits• Plan document “choice of law” only

applicable if not pre-empted by ERISA

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Retirement Plans• Qualified Joint & Survivor Annuities (“QJSA”) and

Qualified Optional Survivor Annuity (“QOSA”)– Default form of payment from a Defined Benefit or Money

Purchase Pension Plan for a married participant– Need spouse’s sign-off on any alternative form

• Qualified Pre-retirement Survivor Annuity (“QPSA”)– Payment to the surviving spouse of the survivor portion of the

QJSA

• Beneficiary notices to same-sex spouses

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Retirement Plans

• Qualified Domestic Relations Orders– Same-sex spouse can now file for QDRO– If same-sex spouse divorced prior to July

2013, can they now file for QDRO?

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Retirement Plans

• Minimum Required Distributions– May need to recalculate

• Pre-retirement Death– Surviving spouse can defer

distribution to participant would have reached age 70½

• Life Expectancy – Based on spouses actual ages

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Retirement Plans

• Rollovers– Spouse beneficiary can roll over

• Directly or indirectly• To an IRA or another retirement plan

– Non-spouse can roll over• Directly but not indirectly• Only to an “inherited IRA”

– Will a previously “inherited IRA” now be eligible for rollover to a retirement plan?

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Retirement Plans

• Hardship Distributions– Reasons include spouse’s education,

medical expenses, funeral expenses– “Available resources” considered to

be reasonably available include spouse’s assets

• Loans– If your plan requires spousal

permission for plan loan, then may need to adjust those forms

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Retirement Plans

• Top Heavy– Key employee status considers

ownership of employee and spouse• Controlled group

– Ownership aggregation includes spouse ownership

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Family Medical Leave Act

• Dept. Of Labor Fact Sheet #28F• “Spouse”—as defined or recognized

by state law where employee resides– Includes common law and same-sex

spouse

State of residency

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Other Areas

• Corporate Discounts• Corporate Fitness Centers• Bereavement leave

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WHAT ARE OTHER COMPANIES DOING?

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US Office of Personnel Management

• Memorandum 6/28/2013• All legally married same-sex spouses

are eligible for health insurance– 60 day enrollment window

• Retirement Plan– Retirees have two years to inform OPM

of marriage– Change in annuity structure– New retirees with same-sex spouses are

eligible for survivor annuities

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Policy Decisions

• Will you cover same-sex spouses in health plan?– Same terms as opposite-sex?– Not at all?– Only if married?– Domestic partner/civil union?– Different for different states?

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Next Steps

• Payroll changes—NOW– Cease imputing federal income for health

benefits for same-sex spouse and cease FICA and FUTA tax payments on these dollars

– Cease any federal tax gross-up arrangements

– Permit affected employees to change their withholding status

– Federal tax only, unless state recognizes marriage

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Next Steps

• “Change in family status”– Does this count?– May want to wait for guidance from

IRS or consult benefits attorney• Make change part of “Open

Enrollment” package

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Next Steps

• Review Health Plan Document– Spouse definition– Coordination of Benefits Provisions– Insurance carriers & stop-loss carriers

definition• Fully Insured Plans

– State insurance rules may prohibit same-sex spousal coverage

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Next Steps

• Retirement Plans– Review document for definition of

spouse– Review plan enrollment and

beneficiary forms• Life Insurance Policy

– Review beneficiary forms– Review document assumption of

beneficiary & definition of spouse

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Employee Communication

• Inform employees of policy changes • If permitting current changes,

establish window period– 30 to 60 days

• Encourage all employees to review beneficiary designations

• Stress confidentiality of all benefit information

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Retroactivity

• If DOMA was unconstitutional, then how far back can things be retroactive?

• Need to know date of marriage and state of ceremony– Legality of same-sex marriages

became effective on different dates in each state

– 2008 to August 1, 2013• FICA & FUTA tax refund

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Retroactivity for Employee

• Employees can request refunds for FICA and imputed income tax– Amend tax filing as “Married filing

jointly”– May not always be beneficial

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Issues

• If you had permitted opposite-sex domestic partnerships to be in plan—now what?

• If you have employees in different states, will you be treating them differently?

• Will employees be willing to tell you that they are in a same-sex relationship?– If they don’t, what liability do you have?

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Unknowns

• Will it be considered discriminatory to treat same-sex spouses differently in states that recognize same-sex marriages than the states that don’t recognize those marriages?

• Will there be a grace period for making corrections/amending plans?

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Unknowns

• What liability does an employer have for any benefit rejection in the past several years to a same-sex spouse?

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Unknowns

• If an employer does business in a state (particularly with any governmental entity) that prohibits discrimination based on sexual orientation then will the benefits programs be subject to scrutiny for potential discrimination?

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Unknowns

• If an employer objects to same-sexmarriages, can that employer elect to not provide spousal health benefits to a same-sex couple and continue to provide spousalcoverage to opposite-sex couples?– Church plans may want to elect “non-

ERISA” status

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Your Questions

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Key Questions Remaining

1. Is this a “Change in Status?”2. “State of ceremony” or “State of

residency” IRS & DOL differ3. Will we need to adjust any prior

pension benefits?

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