An employee dies leaving behind an employer-sponsored qualified retirement account. The same-sex spouse and the parents of the employee both make claims for the benefits. The state in which the couple lived recognizes same-sex marriages. If you were the plan administrator, what would you do?

This is roughly the scenario that played out in Cozen O’Connor v. Tobits.[1] An employee was a participant in her employer’s profit sharing plan. The participant married another woman, Jean Tobits, in 2006 in Toronto, Canada, as permitted under Canadian law. The couple lived in Illinois, which recognizes same-sex marriages solemnized in other jurisdictions. After the participant’s death, both Tobits and the participant’s parents requested payment of a pre-retirement survivor annuity from the plan. Facing competing claims, the employer filed an interpleader action in a Pennsylvania district court naming Tobits and the parents as defendants. The court delayed issuing its opinion pending the outcome of United States v. Windsor.[2]   

Interpleader Actions

An employer faced with competing claims to benefits can seek a decision from a court through an interpleader action before making any distributions. Generally, the employer initiates a court action by naming all of the competing interest-holders as defendants in the litigation so that the employer is not exposed to multiple liabilities stemming from a single obligation; in other words, to avoid paying twice.

Windsor

The federal definition of marriage as only a legal union between one man and one woman as husband and wife is unconstitutional, according to the U.S. Supreme Court in Windsor. The decision overturned section 3 of the Defense of Marriage Act (DOMA),[3] which provided that same-sex couples who were legally married in a state or other jurisdiction[4] were not treated as married for federal purposes, including the tax Code, ERISA and other federal laws.

The Windsor decision concerns estate taxes, but its impact is far broader. The decision created some immediate and pressing issues. In addition to dealing with claims for spousal distributions, employers now need to know if they must make changes to their other benefit plans to treat same-sex couples in the same manner as opposite-sex couples. Employers may have to examine their payroll systems, COBRA policies and cafeteria plans to determine if changes are necessary, and perhaps stop imputing income to employees for health insurance coverage provided to same-sex spouses.  

Unanswered Questions

Windsor left many issues unresolved, leaving employers, plan participants and beneficiaries in a state of uncertainty. The Supreme Court did not rule on section 2 of DOMA, which provides that no state is required to give effect to any other state's recognition of same-sex marriage and any right or claim arising from such a relationship. Thus, states may decline to recognize the validity of same-sex marriages that were legally performed in other states. For example, section 2 allows a state, such as Virginia, to refuse to recognize same-sex marriages legally entered into in another state, such as Maryland, even though Virginia recognizes opposite-sex marriages legally performed in other states. Although 13 states and the District of Columbia permit marriages of same-sex couples,[5] many states have enacted “mini-DOMA” statutes or state constitutional amendments that prohibit recognition of same-sex marriages.[6]

Another area of uncertainty is the effective date of the change in the law because the Windsor decision does not clearly indicate whether the ruling should be applied retroactively or prospectively.

Windsor does not impact civil unions or domestic partnerships in which “partners” are not considered “spouses.” The Court's ruling only immediately impacts same-sex married couples living in jurisdictions that recognize such marriages. The decision did not address whether same-sex marriages of couples who reside in states that either ban or do not recognize same-sex marriages must be recognized. Until the federal agencies issue guidance, the answer is unclear, although President Obama has indicated his preference that the law of the “state of celebration” should control, and the Office of Personnel Management has adopted this position as to benefits for federal employees who have same-sex spouses.[7]

Need for IRS and DOL Guidance

The district court in CozenO’Connor decided that, in light of Windsor, Tobits was the “surviving spouse” under the plan. The court pointed out that Illinois, the couple’s state of domicile, would consider the same-sex spouse to be the surviving spouse.[8]

Plan sponsors are in the uncomfortable position of either absorbing the costs of an interpleader action or risking having to pay twice if they make a distribution to the wrong party. The IRS and DOL must work through these matters and issue guidance. Most likely, the agencies will address only some key issues and many other issues may have to be resolved through future court cases or legislation.

[3]  P.L. 104-199, enacted Sept. 21, 1996. 

[4] The states that permit same-sex marriage are: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota (effective Aug. 1, 2013), New Hampshire, New York, Rhode Island (effective Aug. 1, 2013), Vermont and Washington. The District of Columbia also allows same-sex marriages.    

[5] Some states provide some “spousal equivalent” benefits through civil unions, including Colorado, Hawaii, Illinois, Nevada, New Jersey, New Mexico, Oregon and Wisconsin.   

[6] See National Council of State Legislatures at http://www.ncsl.org/issues-research/human-services/same-sex-marriage-laws.aspx.