IRS and DOL Guidance Clarifies Employee Benefits Impact of Supreme Court's DOMA Ruling

The BNA Tax and Accounting Center is the only planning resource to offer expert analysis and practice tools from the world's leading tax and accounting authorities along with the rest of the tax...

By Joseph S. Adams, Todd A. Solomon, and Brian J.
Tiemann
 

McDermott Will & Emery, Chicago, IL

The U.S. Department of the Treasury, the Internal Revenue
Service (IRS) and the Employee Benefits Security Administration
(EBSA) division of the U.S. Department of Labor (DOL) have issued
guidance clarifying certain employee benefit plan implications of
the Supreme Court of the United States' ruling in United States
v. Windsor
, 133 S. Ct. 2884 (2013). In Windsor, the
Supreme Court ruled that §3 of the Defense of Marriage Act (DOMA)
is unconstitutional. Section 3 of DOMA had provided that, for
purposes of all federal laws, 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 wife."

The recent Treasury and IRS guidance, issued as Rev. Rul.
2013-17, 2013-38 I.R.B. 201, and a set of Frequently Asked
Questions, provides that same-sex couples legally married in a
jurisdiction with laws authorizing same-sex marriage will be
treated as married for federal tax purposes, regardless of whether
the couple resides in a state where same-sex marriage is
recognized. This IRS approach recognizing same-sex marriages based
on the "state of celebration" took effect September 16, 2013. To be
clear, the IRS guidance does not apply to registered domestic
partners, civil unions or other similar relationships recognized
under state law but not denominated as marriage under that state's
law.

The EBSA guidance, Technical Release 2013-04, similarly uses a
"state of celebration" rule and provides that, for purposes of the
DOL's regulations and other guidance interpreting ERISA, a spouse
will include all legally married same-sex spouses, even if the
couple resides in a state that does not recognize such marriages.
EBSA intends to issue future guidance addressing specific
provisions of ERISA and its regulations.

In other words, the Treasury, the IRS and EBSA have adopted a
"state of celebration" rule rather than a "state of residence" rule
for recognizing same-sex marriage with respect to employee benefit
plans. This consistent approach is helpful, because both the IRS
and EBSA have important oversight roles with respect to ERISA
plans.

Curiously, however, with respect to leave rights under the
Family Medical Leave Act (FMLA), the DOL-of which EBSA is a
part-adopted a state of residence rule. The DOL issued that FMLA
guidance prior to the Treasury/IRS and EBSA guidance adopting a
state of celebration rule. It is unclear whether the DOL will
revisit its prior FMLA guidance in light of Technical Release
2013-04. The DOL's FMLA state of residence approach also conflicts
with the state of celebration approach taken by the U.S. Office of
Personnel Management with respect to the ability of employees of
the federal government and the U.S. Department of Defense to enroll
their same-sex spouses in various government benefits, and two
courts' willingness to grant same-sex spousal rights even in states
not recognizing same-sex marriages.  From an employer's
perspective, it obviously would be preferable to have a consistent
result from the various DOL branches.

Employers in all states-not just the 13 states and the District
of Columbia where same-sex marriage currently is legal-must prepare
for spousal benefit requests from same-sex couples. Same-sex
couples residing in states where same-sex marriage is not
recognized may travel to states where same-sex marriage has been
legalized to marry and obtain federal tax recognition of their
marriage. Such benefit requests may relate to any of the employer's
various benefit programs, particularly those benefits where spousal
benefits are required by federal law, e.g., spousal protection
under qualified retirement plans and special enrollment, and
Consolidated Omnibus Reconciliation Act of 1985 (COBRA) rights
under health and welfare plans. In addition, employers should
review their payroll procedures to ensure the proper federal and
state tax treatment of benefits extended to same-sex spouses.

Set forth below is a list of potential implications for a
variety of employee benefit programs.

Defined Contribution Plans  

  •   An employee's same-sex spouse must consent to the
    employee's designation of a beneficiary other than the same-sex
    spouse.
  •   An employee's same-sex spouse must be recognized as the
    default beneficiary under the plan in the event the employee fails
    to designate a beneficiary or the beneficiary predeceases the
    employee.
  •   Plans that permit hardship withdrawals must take an
    employee's same-sex spouse into consideration in determining
    whether the employee is eligible to take certain withdrawals, such
    as medical, tuition or funeral expenses for the same-sex
    spouse.
  •   Plans that permit participant loans must obtain a
    same-sex spouse's consent to a loan if the plan currently requires
    an opposite-sex spouse to consent to a loan.

Defined Benefit Plans  

  •   Spousal survivor benefits in the form of a qualified
    joint and survivor annuity (QJSA) or qualified optional survivor
    annuity (QOSA) and a qualified pre-retirement survivor annuity
    (QPSA) must be extended to same-sex spouses.
  •   Plans that offer optional payment forms in lieu of the
    QJSA/QOSA or QPSA payable to a spouse must obtain a same-sex
    spouse's consent to the employee's election of a payment form
    payable to a beneficiary other than the same-sex spouse.
  •   Employers should consider how to respond to retroactive
    benefit claims from an employee with a same-sex spouse who was not
    recognized at the time payments began or from surviving same-sex
    spouses. The IRS has indicated that it intends to issue additional
    guidance on the retroactive implications of the ruling. However,
    employers may receive claims before the IRS issues its additional
    guidance.

All Retirement Plans  

  •   Same-sex spouses who divorce may enter into a qualified
    domestic relations order to divide retirement plan assets.
  •   Same-sex spouses have the right to directly roll over
    eligible rollover distributions and must be notified of their
    rollover rights.
  •   Required minimum distributions may need to be
    recalculated for employees with a same-sex spouse and can be
    delayed for a surviving same-sex spouse.

Medical, Dental and Vision Benefits  

  •   Employers with insured medical, dental or vision benefit
    plans insured in states where same-sex marriage is legal must
    extend spousal coverage to same-sex spouses.
  •   Employers with self-insured medical, dental or vision
    benefit plans technically are not required to extend spousal
    benefit coverage to same-sex spouses regardless of the state in
    which the employer is located. However, such employers face a risk
    of federal and state discrimination lawsuits if they continue to
    provide coverage only to opposite-sex spouses.
  •   An employee may need to be recognized as having a "change
    in status" event for purposes of adding coverage for a same-sex
    spouse outside of the annual open enrollment period. Same-sex
    spouses may make such elections under protections extended to
    spouses by the Health Insurance Portability and Accountability Act
    (HIPAA).
  •   Continuation coverage under COBRA must be offered to
    same-sex spouses upon termination of employer-provided group
    medical, dental or vision coverage.

Federal Taxation of Health Benefits  

An employee covering a same-sex spouse under the employer's
medical, dental or vision plans must be permitted to pay for the
spouse's coverage using pre-tax contributions under a cafeteria
plan and may take tax-free reimbursements from flexible spending
accounts (FSAs), health reimbursement accounts (HRAs) and health
savings accounts (HSAs) to pay for the same-sex spouse's qualifying
medical expenses. Employer-provided medical, dental or vision
benefits for a same-sex spouse will no longer be subject to federal
income taxation regardless of whether the employee and his or her
spouse reside in a state where same-sex marriage is recognized.
Employers that were providing benefits to same-sex spouses prior to
the Supreme Court's DOMA ruling must update their payroll
procedures to stop imputing the fair market value of such benefit
coverage as federally taxable income of the employee. This same
favorable federal tax treatment does not extend to
employer-provided benefits for an unmarried same-sex partner,
unless the same-sex partner qualifies as the employee's tax code
dependent.

The recent IRS guidance allows employees to claim refunds for
open tax years for income and employment taxes paid on imputed
income for the value of employer-provided benefits for a same-sex
spouse. Employers that provided benefit coverage to same-sex
spouses may want to begin preparing for employee requests for a
corrected Form W-2 for each open tax year in which the employee
paid federal income taxes on benefit coverage for a same-sex
spouse. Similarly, employers may claim employment tax refunds based
on coverage provided to employees' same-sex spouses. Notice
2013-61, 2013-42 I.R.B. __, provides guidance for employers and
employees on how to make claims for refunds or adjustments of
income and employment taxes.

State Taxation of Health Benefits  

Despite the change in the federal tax treatment of benefits for
same-sex spouses, such benefits may continue to be subject to state
income taxation depending upon the laws of the employee's state of
residence.

In states where same-sex marriage is recognized or where
same-sex domestic partnerships or civil unions have been legalized,
employees generally will not pay state income taxes on the fair
market value of coverage for a non-dependent same-sex spouse. 
Employees in these states must be permitted to pay for the same-sex
spouse or partner's coverage using pre-tax dollars for state income
tax purposes.

In states where same-sex marriage is not recognized, guidance is
needed to clarify the rules for taxation of benefits for a same-sex
spouse. The state income tax codes in the majority of these states
rely on an individual's adjusted gross income under federal tax
laws to calculate the amount of the individual's state income
taxes. Now that benefit coverage for legally married same-sex
spouses is no longer subject to federal income taxation, states
where same-sex marriage is not recognized will need to clarify
whether employees must continue to pay state income tax on the
value of benefit coverage for a same-sex spouse.

Other Benefits  

Employers may need to extend other spousal benefits to
employees' same-sex spouses. These benefits can include group rates
for insurance plans, such as supplemental life insurance, long-term
care insurance, home insurance and automobile insurance, as well as
other benefits such as bereavement leave, moving or relocation
expenses, tuition reimbursement, employee discounts and employee
assistance programs. As noted above, the DOL's current position on
FMLA creates some potential issues for leave programs as opposed to
ERISA programs (although some employers may choose to solve the
disconnect by voluntarily adopting a state of celebration approach
in both situations).

Next Steps  

All employers should take action to ensure that their benefit
plans comply with federal laws with regard to benefits for same-sex
spouses. In addition to extending required benefits to same-sex
spouses, employers should review their payroll procedures with
respect to the taxation of such benefits and consider how to
communicate these changes to employees.

 For more information in the Tax Management Portfolios,
see Finston and Jewett, 351 T.M.
, Plan Qualification - Pension
and Profit-Sharing Plans, Brisendine, Drigotas and Pevarnik,
385 T.M.
, Deferred Compensation Arrangements, and Cowart,
389 T.M.
, Medical Plans - COBRA, HIPAA, HRAs, HSAs and
Disability, and in Tax Practice Series, see ¶5430, Employment
Tax Provisions, and ¶5940, Cafeteria Plans.