Post-DOMA Confusion Begins to Clear

A recent federal district court decision and new U.S. Treasury Department guidelines are helping to bring the post-DOMA world into sharper focus.

Thursday, September 5, 2013
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When the U.S. Supreme Court upended the Defense of Marriage Act in June, the victory for same-sex couples was obvious. HR and benefits professionals, however, still faced uncertainty because only 13 states currently recognize same-sex marriages as legal. Recently, two key developments have provided clarity for employers wondering how to manage post-DOMA employee benefits -- especially those with workforces that span many states.

First, a federal district court decision in Philadelphia in the case of Cozen O'Connor, P.C. v. Tobits, one dealing with a pension death benefit and a surviving same-sex spouse, began to move a few of the clouds regarding pension survivor benefits. Then, on Aug. 29, the U.S. Department of the Treasury said that when it comes to taxes, it will recognize legal same-sex marriages, even if the couples live in a state that does not recognize them.

Treasury Secretary Jacob Lew's ruling means a uniform IRS policy, as the state of celebration -- where the wedding occurred -- trumps a residency state when it comes to federal tax status for same-sex married couples.

"Today's ruling provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide. It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve," Lew said in a statement. "This ruling also assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change."

Now, same-sex couples -- no matter where they live in the United States -- will enjoy protection for all federal tax provisions where marriage is a factor, including filing status, employee benefits, IRA contributions, earned income, child tax credits and income, gift and estate taxes.

"The treasury decision is for all tax purposes and for benefit purposes, going to be where the marriage is celebrated," says Fredric Singerman, a Seyfarth Shaw partner based in Washington.  "That means if you are a legally married same-sex couple in Massachusetts and move to Texas, the issue is clear: the IRS recognizes the marriage as legal for tax purposes."

Singerman says the IRS guidelines will resolve most of the employee benefit issues for any ERISA-related scenarios.

"The IRS guidance was a very clear and well-done," he says. "It has resolved the open benefits issues and tax issues with welfare benefits, so a same-sex spouse can take advantage of benefits such as health care reimbursement and flexible spending accounts."

However, just as in the Philadelphia case, the issue of retroactivity is still to be decided. The IRS, Singerman says, was explicit on retroactivity and has issued no guidance yet, though did say at the end of August that there would be guidelines forthcoming.

In the case decided in Philadelphia federal court, Cozen O'Connor, P.C. v. Tobits, the court ruled in favor of a surviving same-sex spouse in deciding who was entitled to the deceased spouse's ERISA-governed retirement plan benefits. The Philadelphia court mentioned the U.S. Supreme Court's DOMA decision (U.S. vs. Windsor) in its decision. Plus, the Cozen retirement plan's promise of a death benefit to a "surviving spouse" included a same-sex spouse.

Specifically, Illinois residents Sarah Farley and Jean Tobits had married in 2006 in Canada (where same-sex marriage is legal). Farley, who died in 2010, was part of Cozen's ERISA-governed retirement plan, so there was a death benefit. Farley's parents and Tobits both claimed it. Cozen then asked the federal court to help determine who should receive the retirement account proceeds.

The Cozen plan document said "spouse" was defined as "the person to whom the participant has been married throughout the one-year period ending on the earlier of: (1) the participant's annuity starting date; or (2) the date of the participant's death." Tobits had not waived her right to Farley's pension benefit.

The decision in Philadelphia suggests that the DOMA repeal now opens the definition of spouse to include same-sex spouses, "as long as the state in which the couple resides legally recognizes the marriage even if [the state] has not legalized same-sex marriage," says Evie Jeang, managing partner of Ideal Legal Group, a Los Angeles-based law firm.

"This decision puts employers in a potentially difficult position," Singerman says. "[In Cozen], the employer hasn't paid the money out. But you can envision situations where a designated beneficiary gets payment, but the employer's plan did not have prior permission of a same-sex spouse."

Singerman says the Philadelphia decision gets to two things. One, some employers are erroneously thinking that state of residence is the key factor. As it turns out, it's more about where the marriage was celebrated (same as the new IRS guidelines). The second issue is retroactivity. In other words, if DOMA was unconstitutional in July, it was unconstitutional before that date as well.

"I can't see how plan sponsors can look backwards to dollars paid if the employer had a prudent plan in place," he says. "But it does raise a question as to what becomes prudent if don't have the same-sex spouse listed on a policy."

The Philadelphia court noted that before DOMA's overturning, same-sex spouses were not entitled to benefits from ERISA-governed retirement plans (although many ERISA-governed plans did give benefits). However, in the post-DOMA world, the Philadelphia court ruled that under the Cozen plan the term "spouse" was not unconstitutionally restricted to members of the opposite-sex and included same-sex spouses of valid marriages. The Treasury's announcement made that argument even stronger.

Also, the Philadelphia court determined that Farley and Tobits were deemed validly married by Illinois (in probate court), and while Illinois does not recognize same-sex marriages, the court said it permits same-sex civil unions and recognizes same-sex marriages from other jurisdictions.  

(Author's note: Farley's parents filed an appeal at the end of August, claiming that the Philadelphia court judge erred when he decided Illinois would recognize Farley and Tobits' marriage. Their contention is the state's civil-union law didn't exist when Farley died in 2010, and the state still does not recognize legal marriage).

According to Jeang, anything in the wake of the Windsor decision involving a recently deceased employee's benefits awarded to the spouse (medical insurance, retirement plan, etc.) will come under extreme scrutiny. The most important impact for employers to focus on would be the changes in insurance, health benefits and taxes for spouses in a same-sex marriage.

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"The repeal of Section III of DOMA equalizes homosexual spouses with their heterosexual counterparts," she says.

She says employers should focus on the changes now when they include same-sex marriages and the new benefits they may receive if faced with a situation like the case decided in Philadelphia.

"Employers need to understand the state's policies on same-sex marriage [where their employees reside]," she says. "If the state recognizes same-sex marriage, then the employer must understand that claims for any benefits normally granted to the spouse over the family can be generated by the same-sex spouse."

She adds HR must be clear with details involving changes in employee contracts and what is included now in their contract, adding that the safest rule is to assume a same-sex spouse will have the same right to claim benefits as an opposite-sex spouse. 

In the Cozen case, Singerman says the employer was smart to focus on the distribution in advance, a step he recommends for all employers -- that is, seeking some level of confirmation that no same-sex marriage is in place before paying out any death benefits.

Keith McMurdy, a partner in Fox Rothschild's New York office, says a major takeaway from the Philadelphia decision is the existing lack of definition of the term "spouse" in the benefits arena for employers.

"There is no clear-cut direction on the definition of spouse, if your state recognizes same-sex marriage or not," he says. "More than anything else, definition of spouse is critical. And have you, as a plan sponsor, looked at these issues? This is something that should be done right away."

In short, plan sponsors need to define what the term spouse means and then adjust the plan accordingly.

"What this case says is if you haven't thought about it, here are some things you should really think about with your plans," McMurdy adds, noting that, by having a clear definition in its plan, Cozen had a much easier time of it than an employer who has not taken that step.

Also, plan sponsors seeking information about the existence of a same-sex spouse also raises the issue of discrimination and harassment.

"Would a prudent plan administrator go to a gay employee and ask if they have a same sex spouse?" he says. "It's almost as if in order to comply, plan sponsors have to know more about the employee population than they really want to know."

McMurdy says he has spoken to LBGT groups and tells them that part of what he perceives as the problem is they have to be more open to inquiries about their marital status. He adds that employers don't care if an employee wants to keep a same-sex marriage private, but it is a concern when it comes to benefits.

"The plan sponsor has to know these things so if an unexpected death occurs, the same-sex spouse rightly will receive the 401k benefit," McMurdy says. "It's actually a chance for employers and their employees to create a dialogue about the issue."

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