In 2013, the U.S. Supreme Court held in United States v. Windsor that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional and that the federal interpretation of “marriage” and “spouse” should not apply solely to heterosexual unions. To date, same-sex marriage has been legalized in 17 states and the District of Columbia, and the number of states recognizing the validity of same-sex marriage continues to grow and be subject to court proceedings. As a result, employers continue to navigate the nuances of their domestic partner, civil union, and same-sex spouse policies as they relate to employment issues and benefits. If you previously attained employee benefits pursuant to these domestic partner policies or recently entered into a legally recognized same-sex marriage, revisit your employee benefits and consider the following issues.
1. What were the employee benefits exclusions for same-sex spouses prior to the Windsor decision, and what types of employee benefits are now available to employees with legally married same-sex spouses?
Prior to the Windsor decision, the federal definition of “spouse” under DOMA was applied to hundreds of federal statutes, including those that govern benefits, such as ERISA and the Internal Revenue Code. Therefore, a same-sex partner was not recognized under federal law as a legal spouse who could be entitled to certain spousal rights in benefit plans or favorable tax treatment. Some examples of how employee benefits were impacted include:
For health and welfare plans before the Windsor decision:
- Health coverage might not have been extended to same-sex partners under an employer plan unless the plan was self-insured and the employer chose to do so or unless the plan was fully insured and the insurance was issued in a state that required such coverage (for example, the New York Marriage Equality Act, which passed in July 2011, required insured plans issued under NY contracts to extend coverage to same-sex partners).
- The value of any employer-provided health coverage for a same-sex partner of an employee who was not otherwise a dependent had to be included in the employee’s income.
- Employees could not pay for premiums for same-sex partner coverage on a pre-tax basis through a cafeteria plan or obtain reimbursements from flexible spending accounts for same-sex partners unless the partner qualified as a dependent.
- Employees would not be able to make mid-year election changes based on a change in marital status in cafeteria plans.
- Same-sex partners would not have qualified as spouses for continuation of health coverage under COBRA.
If you are now in a legally recognized same-sex marriage, check with your employer as to coverage options for your new spouse and inquire about special enrollment rights or making a midyear election change on the basis of change in legal marital status for health coverage and flexible spending or similar accounts within required time frames pursuant to your employer’s cafeteria plan. The value of coverage for your same-sex spouse should no longer be imputed as income if it was previously, and you should be able to pay for coverage on a pre-tax basis if your employer offers a cafeteria plan; additionally, you can obtain reimbursements from flexible spending accounts for same-sex spouse medical expenses. Your same-sex spouse can also qualify as a “spouse” for purposes of COBRA continuation coverage in case of a qualifying event.
For retirement plans before the Windsor decision:
- Same-sex partners would not qualify as spouses for purposes of qualified joint and survivor annuities, qualified preretirement survivor annuities, or survivor benefits under pension plans or 401k plans.
- Spousal consent rules would not apply for purposes of naming beneficiaries or taking distributions.
- Benefits could not be assigned to a same-sex partner who was not a spouse under a qualified domestic relations order.
- Hardship distributions could not be taken on account of same-sex spouse expenses.
If you are now in a legally recognized same-sex marriage, a same-sex spouse is a spouse for purposes of any qualified joint and survivor or similar annuities, same-sex spouse expenses are recognized for hardship withdrawals, spousal consent of a same-sex spouse is required before an employee names another beneficiary under a retirement plan, same-sex spouses are spouses for survivor benefits and qualified domestic relations orders, a same- sex spouse may now roll over a plan distribution to his or her own IRA rather than to an inherited IRA, a same-sex spouse must be taken into account for plan testing purposes where family attribution rules come into play, and a same-sex spouse is factored into any required minimum distribution calculations.
The rules do not change, however, for domestic partners or members of a civil union who are still not treated as spouses under the law.
2. What can employees do to recover federal income tax paid on the value of same- sex spouse health coverage that was imputed as income to the employee?
There was a series of guidance issued last year after the Windsor decision that addressed refunds of income tax as well as FICA (Social Security and Medicare taxes) that would have been overpaid if the value of health coverage was imputed. Employees can claim a refund by completing amended 1040s for overpayments of federal income tax on the value of health coverage that may have been imputed as income or for coverage that was purchased on an after-tax basis rather than a pre-tax basis for prior tax years—going back up to the later of three years from the date the return was filed or two years from the date the tax was paid. Employees should speak to their employers to request amended W-2Cs. This will be important to ensure proper filings are completed for the 2013 tax year.
With regard to FICA taxes, there were different procedures available to correct 2013 errors if completed in 2013. An employer could have corrected its quarterly tax filings in 2013 and reimbursed the employee for any overpayments of FICA. If this was not done, an employer can file a Form 941X to correct 2013 and prior tax years that are eligible for correction if the employee consents to the employer reimbursing him or her and doing the filing. Otherwise, if it is not practical for an employer to do the filing for various reasons, an employee can seek a refund of his or her own overpayments of FICA taxes by filing a Form 843.
So, there is some level of coordination here that needs to occur. Employees who have these issues should approach their employer and inquire as to how this is being handled, request a revised Form W-2C for the employees’ own 2013 Form 1040 filing and prior years’ amended returns, and inquire how any overpayments of FICA tax will be recouped or whether the employee should seek their own refund from the government by filing a Form 843.
3. What should employers do to ensure benefit plan compliance with the new legal landscape, and what open issues still remain?
- Employers should definitely assess where they are in terms of employee demographics and, if operating in different states, determine if there are state payroll tax issues that differ from state to state and whether same-sex spouse, domestic partner, and civil union benefits are being offered consistently.
- If the value of health coverage had been imputed for same-sex spouses, that process needs to cease for federal tax purposes—however, local state laws may differ on the tax treatment, so that still needs to be considered.
- Review all benefit plans, summary descriptions, communications, and domestic partner packages—all of these documents need to be reviewed to confirm how “spouse” is defined and determine if anything needs to be updated to be consistent with the new law, and confirm where any plan amendments may be required.
- Update any COBRA procedures and paperwork to include same-sex spouses, and revise beneficiary forms and all processes and procedures to include same-sex spouses as spouses for all purposes.
- Allow midyear election changes in cafeteria plans that pertain to same-sex spouses as spouses.
- Ensure that reimbursements for flexible spending and similar accounts are properly being made for same-sex spouses.
- Request updated beneficiary elections, and determine if you need to obtain consents for someone other than the same-sex spouse to be named a beneficiary.
- Develop a communications plan for employees on these issues, and determine your strategy with regard to any claims for refunds of FICA taxes.
We are still awaiting guidance, however, on the retroactive effect of the Windsor decision for purposes of plan qualification. It is unclear if retirement plans will be required to comply with the Windsor decision retroactively in order to maintain their qualified status. This is significant because if it is ruled that the Windsor decision must be applied retroactively for plan qualification purposes, pensions would need to be recalculated; beneficiary issues would need to be revisited; rights to death benefits would need to be reviewed; required minimum distributions would need to be recalculated; plan rollover, hardship, and loan consent issues would need to be addressed; and plan testing issues could arise. We are awaiting guidance from the IRS and Treasury Department on these issues.
And, of course, the number of states that recognize same-sex marriage as valid continues to grow and be subject to controversy. Until all 50 states recognize same-sex marriages, the nuances in tax treatment and benefits will need to be administered properly as there isn’t one uniform set of rules.
Employers should consult with qualified benefits counsel to review their same-sex spouse, domestic partner, and civil union policies and prepare appropriate amendments to benefit plans, materials, and processes. Individuals in legally recognized same-sex marriages should review their employee benefit plans and compensation arrangements and make appropriate inquiries to their employers. It will also be necessary to review any personal income tax and estate planning considerations as well with the appropriate advisors. As they say, marriage is a lot of work, but it can be fun, too!