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A Continuing Look at Same-Sex Spousal Benefits After U.S. v. Windsor

January 9, 2014

As noted in our client alert from July of last year, we continue to analyze guidance issued by the IRS and the DOL that impacts employee benefit plans in light of the United States Supreme Court’s decision to strike down Section 3 of the Defense of Marriage Act (“DOMA”) in U.S. v. Windsor

As we noted in July, there was considerable confusion with respect to how same-sex married couples would be treated in those states that do not recognize same-sex marriages. Since that time, the IRS and the DOL have both issued guidance that same-sex couples who were lawfully married in a state or jurisdiction that recognizes same-sex marriages will be treated as married for federal taxation purposes.  This has been commonly referred to as the “state of celebration” rule, and the practical result is that a same-sex couple who is legally married in Connecticut (or another state that permits same-sex marriages) will be recognized as married for federal tax purposes in all states, even those that do not permit same-sex marriage.  Currently, 15 states (and Washington D.C.) recognize same-sex marriage.  Same-sex marriage will become legal in a sixteenth state, Illinois, on June 1, 2014. 

Under the IRS and DOL guidance, same-sex partners in a civil union or domestic partnership will not be treated as married under federal law and will not be afforded the spousal rights that we discuss below.

As a reminder, the Supreme Court did not invalidate Section 2 of DOMA.  That portion of DOMA provides that no state is required to recognize a same-sex marriage or to recognize a right or claim arising from such a relationship.  However, for federal law purposes, including for purposes of interpreting ERISA and the Internal Revenue Code, the “state of celebration” rule will govern.

Retirement Plans

As we pointed out in July, one of the biggest changes resulting from the Windsor decision is that defined benefit plans now have to apply the qualified joint and survivor annuity rules to same-sex spouses, and that defined contribution plans now have to treat the same sex spouse as the automatic beneficiary absent a waiver. 

Employers may want to remind employees to review their beneficiary designations. An employee with a same sex spouse may have purposefully designated someone other than his/her spouse as the beneficiary.  Before Windsor, this would have been effective, but now it will require a waiver by the same sex spouse.

One area that still has not been definitively addressed by the IRS or DOL is whether the Windsor decision will be applied retroactively with respect to qualified retirement plans.  An issue could arise, for example, if a 401(k) plan paid a deceased participant’s entire benefit to someone other than his/her same-sex spouse in 2012.  Would the same-sex surviving spouse in that situation have any recourse or rights against the Plan?  We will continue to monitor guidance issued by federal agencies with respect to the retroactive application of the Windsor decision.

Health & Welfare Plans

Employees can now elect coverage for same-sex spouses on a tax-free basis under Sections 105 and 106 of the Code and a Section 125 cafeteria plan.  The IRS has issued guidance setting forth that a participant in a Section 125 cafeteria plan who was married on the date of the Windsor decision (June 26, 2013) will be treated as if such participant experienced a change in legal martial status for purposes of the Section 125 rules.  This guidance allows an employee to revoke an existing election or make a new mid-year election for purposes of a Section 125 plan.  In addition, employees that were married on the date of the Windsor decision can now take tax-free reimbursements from health care flexible spending accounts and dependent care flexible spending accounts for covered expenses that were incurred by a same-sex spouse during a period beginning on any date that is on or after January 1, 2013 (or the participant’s date of marriage, if later).  Same-sex couples also are now subject to the joint deduction limit for contributions to an HSA during a tax year.  Similarly, same-sex couples are subject to the maximum annual contribution limits for dependent care FSAs.

After the Supreme Court’s decision, employers also were required to cease imputing income for federal tax purposes on the value of employer-provided health coverage for a same-sex spouse.  Employers need to decide whether to claim a refund for the excess Social Security and Medicare taxes paid on imputed income in 2013 in accordance with the procedures set forth in IRS Notice 2013-61.  Employers may also seek refunds for open tax years prior to 2013 in accordance with the special procedures outlined by the IRS.  Because these procedures are complicated and time-sensitive, we would encourage employers to consult with their tax professionals to ensure that any refunds sought are done correctly.  Of course, you may also contact any of the lawyers in our Employee Benefits Practice Group for further guidance.

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