DOMA Decision to Have Pervasive Impact on Plan Administration, Practitioners Say


The U.S. Supreme Court decision striking down a key part of the Defense of Marriage Act expanded employee benefit rights and provided administrative relief for employee benefit managers in parts of the United States that recognize same-sex marriage, but for employers in other parts of the nation, the consequences of the decision will be challenging, a benefits attorney said in discussing the high court ruling.

The decision, which made it “a significant day for benefit plan sponsors and certainly for their employees,” created “a mass of confusion” with respect to administering the benefits of employees with same-sex spouses who live in states that do not recognize same-sex marriage but were legally married in states that do, said Todd A. Solomon, a partner McDermott Will & Emery in Chicago.

“There's no clarity whatsoever as to whether those protections also apply to employees who are married in New York but live in Florida, for example,” Solomon said. Florida is one of 38 states that currently do not recognize same-sex marriage. Same-sex marriage is recognized in 12 states, including New York, and the District of Columbia.

Susan Katz Hoffman, a shareholder at Littler Mendelson in Philadelphia, agreed that many quandaries are unresolved. “What if the couple lives in a non-recognizing state? Can the employer still define “spouse” narrowly? Is the court's decision retroactive? Will domestic partnerships be treated as marriages for federal purposes?” she said in a June 26 statement.

The U.S. Supreme Court ruled June 26, in a 5-4 decision, that DOMA Section 3's exclusion of state-sanctioned, same-sex marriages from the federal definition of marriage “is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment” (United States v. Windsor, U.S., No. 12-307, 6/26/13).

The court's ruling affirms a holding of the U.S. Court of Appeals for the Second Circuit.

In Windsor, Edith Windsor challenged the tax code provisions that required her to pay $363,053 in estate taxes upon her wife's death. The two women were married in Toronto in 2007, a union that the lower courts concluded would have been recognized by their home state of New York.

Windsor paid the tax bill and filed a request for a refund. The Internal Revenue Service denied the request, prompting Windsor to sue in federal district court.

Far-Reaching Consequences 

The Supreme Court's ruling will have far-reaching consequences, as the language of DOMA's Section 3 affects, according to the decision by Justice Anthony M. Kennedy, more than 1,000 federal laws. Laws related to estate and gift taxes, retirement accounts, qualified pension plans, Social Security benefits, and tax return filings are all areas in which taxpayers and practitioners will see major effects from the court's ruling.

The most immediate and pressing challenges in the area of retirement benefits will come in dealing with qualified joint and survivor annuity and qualified pre-retirement survivor annuity rights under defined benefit pension plans, Solomon said. “Automatic beneficiary rights will apply to same-sex spouses now” in states affected by the ruling, he said.

In those states, qualified domestic relations orders will now apply to same-sex spouses, as will minimum required distributions and other technical rules under qualified plans, Solomon said.

Whether the decision's consequences for administering employee benefits will be mostly prospective is not immediately clear, Solomon said. “If a law is deemed to be unconstitutional, it's oftentimes deemed to be unconstitutional retroactively,” he said.

One consequence could be a wave of claims for refunds of income taxes paid, “with people filing amended returns and employers filing for refund of payroll taxes,” Solomon said.

The Windsor decision could have significant effects on the design and operation of private-employer benefit plans, Hoffman said.

For example, an employee with a valid same-sex marriage will be treated as having a spouse for any benefit plan referring to “spouses,” employers can provide spousal medical benefits without imputing income to the employees, and same-sex spouses will receive spousal status with respect to Section 401(k) and other retirement plans, Hoffman said.

Praise for the Decision 

The American Benefits Council, which filed an amicus brief in the case, praised the decision. President James A. Klein state in a statement: “Today's decision to strike down DOMA frees employers from a number of financial and administrative burdens and we applaud the Court's ruling. Of course, this ruling brings new challenges as employers now must be mindful of significant variations in state laws regarding same-sex couples.”

“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,” Klein said.

ABC was part of a group of more than 200 large employers that filed an amicus brief with the Supreme Court in the case, expressing their views on what they saw as the burdens of DOMA.

The ERISA Industry Committee also chimed in on the decision, as well as on a June 26 ruling by the high court reinstating a judge's order to allow same-sex marriages in California. “Today's rulings by the U.S. Supreme Court could have a significant impact on the way employee benefit plans are administered,” ERIC President Scott J. Macey said in a statement. “Companies will need to carefully evaluate their plans in light of these decisions,” he said.

“Today's decisions mean that valid same sex marriages in a state that recognizes them must be recognized by the federal government,” Macey said. “That recognition would include tax and [Employee Retirement Income Security Act] employee benefit matters, including presumably the recognition of tax-exempt spousal coverage under a health plan and the right to a qualified joint and survivor annuity under a pension plan,” he said.

However, Macey pointed out that the decision also left many unanswered questions.

“Among the issues that will need to be addressed further include how quickly plans will need to act as a result of the Court's decisions and the best methods for implementing these changes. Employers clearly will want to review their current plans and policies with respect to same-sex spouses to determine whether they are in compliance with applicable post-decision rules, determine what actions need to be taken, and what areas might need further clarification from the federal government or the courts,” he said.

Excerpted from a story that ran in Pension & Benefits Daily (6/27/2013).