Don't look now, but same-sex benefits just went from "cutting edge" to "needed yesterday." As a result, employers across the country must make immediate -- and in some cases, retroactive -- changes on a number of fronts, including tax withholding and eligibility for employee benefits.
By Bob Christenson
According to the Gallup organization, in 2004, 42 percent of Americans supported marriages between same-sex partners, while 55 percent were opposed. In a poll released May 21, those numbers reversed, with 55 percent supporting gay marriage and 42 percent opposing. More significantly, 78 percent of Americans between 18 and 29 supported same-sex marriage. The recent Gallup poll follows the U.S. Supreme Court’s landmark opinion in U.S. v. Windsor, in which the Court held that a federal law limiting the terms "spouse" and "marriage" to heterosexual couples was unconstitutional. That decision set off a spate of lawsuits challenging state laws banning same-sex marriage, and prompted the Internal Revenue Service and U.S. Department of Labor to issue guidance directing employers to revise benefit plans and certain policies to recognize same-sex marriage.
In the meantime, proponents of same-sex marriage have reeled off an unbroken string of victories in court cases challenging state bans on same-sex marriage.
While most of these rulings have been stayed to allow appeals, in a nod to growing public opinion, many state politicians have opted not to challenge them. Given the Supreme Court’s pronouncements in Windsor, it is very unlikely that appeals will stem the tide of gay-rights victories. As the Gallup pollsters put it, a national tipping point has been reached.
So what must employers do?
Both the Internal Revenue Service and the U.S. Department of Labor were quick to issue basic guidance after the Windsor decision, but were inconsistent in their approach. With respect to federal taxes, the IRS chose a "place of celebration" position: as long as individuals validly married in a state that recognized same-sex marriage, those persons were "spouses" and "married," regardless of where they lived. The DOL opted for a "place of residence" approach: validly married same-sex partners were "spouses" and "married" only if they resided in a state that recognized such marriages. Then, on June 19, 2014, the DOL reversed course and fell in line with the IRS, proposing that for FMLA purposes, the term "spouse" included validly married same-sex partners regardless of where they lived.
The DOL’s action brings consistency to the government’s position on same-sex marriage and allows employers to implement policies without tracking day-to-day changes in state laws or employee residence.
The bottom line is that savvy employers are taking a hard look at employment policies and benefits to determine where changes must be made. Here are specific issues employers should consider:
Federal Employment Taxes and Withholding
With the advent of Windsor, validly married same-sex spouses are "married" and "spouses" for all purposes under federal tax law. This means the cost of coverage under an employer-sponsored group health plan is considered pre-tax instead of post-tax. Prior to Windsor, if same-sex spouses were covered under an employer health plan, the value of this coverage was considered taxable income and imputed to the employee-spouse. Now, employer payroll systems must be changed so that imputed income is not assessed. Moreover, employees and employers who paid income or FICA or FUTA taxes on these amounts in the past are entitled to refunds or credits with respect to tax years that remain open. In Notice 2013-61, the IRS issued detailed instructions describing how employees and employers can recover these overpaid amounts.
Employers should take a "wait-and-see" approach when it comes to state taxation. Most states piggyback on federal tax law, meaning that after Windsor, validly married same-sex couples are taxed in the same manner as married couples of the opposite sex.
However, some states have excepted themselves from federal rules when it comes to same-sex marriages. Chances are, these exceptions will disappear as challenges to bans on same-sex marriages succeed across the country, but no one knows when this will occur. The best approach is to contact each state in which an employer pays employment taxes to ensure compliance. These contacts should be updated periodically to verify that prior advice remains valid. With respect to open tax years, states that follow federal tax rules also will allow an employer to request refunds or credits for taxes that were withheld in the past because of pre-Windsor law.
Qualified Retirement Plans
Most employers sponsor "qualified" retirement plans such as profit sharing plans, 401(k)s, or defined benefit plans. The IRS has stated that to remain qualified, these plans must be administered to comply with Windsor no later than June 26, 2013. "Compliance" means that validly married same-sex spouses must be treated as "married" and "spouses" for all purposes. For example, if a plan provides a joint and survivor spousal benefit or requires spousal permission for a married participant to receive an alternative form of benefit, then a same-sex spouse must be taken into account. Similarly, same-sex spouses count for hardship distributions, minimum distributions, loans or special rollover rules and are eligible to receive benefits under qualified domestic relations orders. Moreover, plan sponsors must update beneficiary designation forms (which may require spousal consents) and plan summaries to reflect new rules.
If a plan must be amended to bring its definition of "spouse" or "marriage" into compliance, then this amendment must be made no later than the later of (i) the end of the plan’s remedial amendment period, or (ii) December 31, 2014, and must be effective no later than June 26, 2013. The IRS suggested that even if a plan sponsor does not believe its qualified plans require amendment, a clarifying amendment should be made to memorialize Windsor compliance. Sponsors also can opt to comply with Windsor prior to June 26, 2013, but this can create administrative problems.
Employer-Sponsored Welfare Plans
Unlike qualified retirement plans, the impact of Windsor on employer-sponsored welfare plans such as group health plans, dental and vision benefits, life insurance plans and AD&D coverage is unclear. The IRS has promised advice on this issue in the near future. Regardless, employers should consider covering same-sex spouses and their dependents under their welfare plans to reduce the risk of litigation and employee discontent. What is clear is that after Windsor, same-sex spouses who participate in group health plans are eligible for reimbursement under HSAs, HRAs and flexible spending accounts and must be taken into account with respect to dependent care assistance programs. Further, participating same-sex spouses have special enrollment rights under HIPAA and continuation rights under COBRA.
Effective in 2015, the Affordable Care Act requires "large" employers to provide certain health coverage for employees and dependents or pay a penalty tax. For this purpose, the term "dependent" does not include spouses, regardless of sex. So, employers may exclude spouses from their health plans without exposing themselves to the ACA’s "play or pay" tax. The term "dependents" does include children, however, and if the child of a same-sex spouse is a "dependent" of the employee, that child must be covered.
The Family and Medical Leave Act allows covered employees to take up to 12 weeks of job-protected leave during a year because of certain events, including care of a spouse with a serious health condition. After Windsor the term "spouse" includes validly married same-sex partners, regardless of residency. Employers should ensure that their FMLA policies are up to date, especially in view of the DOL’s initial (and now discredited) advice that place of residency was critical to recognition of same-sex marriage.
Controlled Groups and Benefit Plan Discrimination Rules
Most federal tax rules prohibiting discrimination in employee benefit plans treat all employers within a "controlled group" as a single employer. These rules affect qualified plans, cafeteria plans, employer self-funded health plans and, in the near future, employer insured health plans. The make-up of a controlled group is determined by applying complex ownership rules, which in some cases attribute ownership of trades or businesses between spouses. In these cases, same-sex spouses will now be taken into account when determining the make-up of controlled groups. Employers whose controlled groups may change because of Windsor may need to reconsider their ownership structures or retest to make sure their plans have not become discriminatory.
Caution about Domestic Partners
Many employers have historically allowed domestic partners to participate in health plans, treating them as spouses for purposes of health plan coverage. Windsor did not impact domestic partners, since these individuals are not validly married. So, while there are both tax and benefit issues to consider for validly married same-sex partners, those same issues do not apply to domestic partners.
That said, in states that still observe common law marriage and allow same-sex marriage, a same-sex domestic partner may qualify as a common law spouse.
Bob Christenson is a partner in the Atlanta office of Fisher & Phillips.