Health & Welfare Notes
Vol. 18, Issue 4 September/October 2013
U.S. Supreme Court’s DOMA Decision’s Affect on Employee Benefit Plans
On June 26, 2013, the U.S. Supreme Court announced its decision in United States v. Windsor, declaring unconstitutional Section 3 of the Defense of Marriage Act (DOMA), which defines “marriage” for purposes of all federal laws as the marriage between one man and one woman. As a result, for purposes of any federal law, including the Internal Revenue Code and Employee Retirement Income Security Act (ERISA), a same‑sex couple who is legally married under state law must be treated as married. In response to the Court’s decision, the federal government has begun updating its numerous regulations that refer to spouses or marriage.
On August 29, 2013, the IRS issued Revenue Ruling 2013‑17 that states the IRS will treat a same‑sex marriage recognized as valid by the state (or foreign jurisdiction) in which it was “initially established” (i.e., the “state of celebration”) as a marriage for federal tax purposes, regardless of the married couple’s place of residence. The ruling also states the terms “spouse,” “husband,” and “wife” will be interpreted as including the same‑sex spouses in such marriages. The IRS ruling may, or may not, have an impact on administering State tax law, depending on whether or not the state utilizes the IRS definitions or their own.
On September 18, 2013, the DOL issued Release No. 2013‑04, that also recognizes a ceremonial definition of marriage in light of the Windsor and IRS decisions. “Marriage” includes a same‑sex marriage that is legally recognized as a marriage under any state law. This definition does not include domestic partnerships or civil unions regardless of the sex of the couple. The DOL reasoned that benefits based upon state of domicile would create “substantial financial and administrative burdens” resulting in “errors, confusion, inconsistency for employers, individual employees, and the government.” Relying upon the recognition of “spouses” and “marriage based upon the validity of the marriage in the state of celebration, rather than based on the couple’s domicile,” promotes uniformity in administration of employee benefit plans.” Furthermore, HHS will also incorporate this definition of marriage to ensure consistent administration under ERISA and HIPAA.
The primary impact will involve Internal Revenue Code and federal benefits laws and for employers sponsoring employee benefit plans, the implications of the decision may be significant. Prior to the Supreme Court’s ruling, same‑sex spouses were treated as unmarried for federal employee benefit purposes. Now same‑sex spouses will be treated as married for purposes of federal statutes such as the Internal Revenue Code, ERISA, the Family and Medical Leave Act (FMLA), the Americans with Disabilities Act (ADA), the Age Discrimination in Employment Act (ADEA), the Genetic Information Nondiscrimination Act (GINA), HIPAA, etc. Therefore, where under DOMA employees have generally been taxed on the health and welfare benefits provided to their same‑sex spouses, now same‑sex spouses will be entitled to the same tax treatment as opposite‑sex spouses. The court decision does not change federal laws that apply to individuals in domestic partnerships or civil unions since these individuals are not in legal marriages. The ruling allows taxpayers to retroactively file amended returns. Corresponding refunds are available to employers for social security and Medicare taxes paid on the imputed income for open years, typically three years from the date the return was filed or two years from the date the tax was paid (typically 2010, 2011, 2012). The requirements for filing a claim for refund or for making an adjustment for an overpayment of the employer and employee portions of social security and Medicare taxes can be found in the Instructions for Form 941‑X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Qualified retirement and health plans must comply with these IRS rules prospectively as of September 16, 2013. The IRS has not yet provided guidance on the application of Windsor with respect to qualified retirement plans before September 16, 2013 or if a same‑sex spouse has any causes of action under ERISA for events occurring before September 16, 2013.
Some examples of the impact of DOMA and the IRS Ruling on Welfare Plans and Qualified Retirement Plans that went into effect on September 16, 2013 are listed below:
1. Pre‑tax payment of Premiums (cafeteria plans): As of September 16, 2013, employers must stop imputing income for health benefits for same‑sex spouses. Employees in a same‑sex marriage should be permitted to pay for the coverage on a pre‑tax salary reduction basis.
2. Health Flexible Spending Arrangements/Reimbursement Accounts (FSAs under cafeteria plans and/or HRAs): Claims for reimbursement of medical care expenses for a same‑sex spouse may be permitted under health flexible spending account plans. Employers should treat expenses incurred in 2013 by these individuals as eligible for reimbursement.
3. Dependent Care Assistance Plan: When applying the rules regarding reimbursements under a dependent care assistance plan, a same‑sex spouse should be recognized.
4. Health Savings Accounts (HSAs): A same‑sex spouse will be recognized for purposes of determining eligibility to contribute and the contribution limit. If both spouses work for the same employer, keep in mind that the couple must now share a family HSA contribution, reducing their previous individual HSA maximum amounts by 50%.
5. HIPAA Special Enrollment Rights: HIPAA requires employer health plans to allow an opposite‑sex spouse to enroll in his or her spouse’s employer’s health plan when the opposite‑sex spouse loses eligibility under his or her own employer’s health plan for certain reasons (e.g., loss of job, termination of plan). Same‑sex spouses will now have special enrollment rights.
6. COBRA and USERRA: Legal same‑sex spouses are eligible for health plan continuation coverage under COBRA and the Uniformed Services Employment and Reemployment Rights Act (USERRA) (to the extent the spouses are eligible for coverage under the group health plan).
Qualified Retirement Plans
1. Qualified Joint and Survivor Annuity (QJSA) and Qualified Pre‑Retirement Survivor Annuity (QPSA): Currently, defined benefit plans (and defined contribution plans that offer survivor annuity options) must provide automatic survivor benefits to a spouse via QJSA and a QPSA, unless the participant elects otherwise with the consent of his or her spouse. This legal order now extends to individuals in same‑sex marriages.
2. Spousal Consent: The naming of a non‑spouse beneficiary is not permitted unless the spouse waives this right to at least a percentage of the benefit. In addition, plans that provide for a QJSA require spousal consent prior to the participant receiving a loan from the plan. In both instances, this now includes same‑sex spouses.
3. Qualified Domestic Relations Orders (QDROs): A same‑sex spouse may receive a portion of the participant‑spouse’s accrued benefit or plan account under a QDRO pursuant to the dissolution of the same‑sex marriage.
4. Rollovers: The same‑sex spouse of an employee may elect spousal rollovers to his or her own IRA upon the death of the employee, enabling the surviving spouse to receive payments over his or her lifetime.
(Excerpts from Walters Kluwer, ft william.com, 9/24/2013; HR Policy Association,CHRO Guide, Sept. 2013)
Disclaimer – This newsletter’s purpose is to inform our clients and friends of recent legislative health care-related developments. It is not intended, nor should it be used, as a substitute for specific legal advice.
Health and Welfare Notes is prepared four to six times annually and will accompany Retirement News. If there are questions concerning the information discussed, call richard Gabriel associates and ask for Gabe Zinni, Karen Irwin, Cindy Swartz or Nancy Cunningham.