The Supreme Court’s recent ruling that a key portion of DOMA (the Defense of Marriage Act) is unconstitutional has been hailed as a major victory for proponents of same-sex marriage in the U.S. The ramifications of this ruling, however, will reach deep into many of the country’s fiscal programs “ including employee benefit programs, like your qualified retirement plan.
Before we discuss the impact of DOMA on retirement plans, it’s important to clarify exactly what the recent Supreme Court ruling did and did not do.
When DOMA was initially signed in 1996, it defined marriage as a Federally recognized union between one man and one woman; in other words, a spouse could only be a person of the opposite sex. As a result, this meant that those in a same-sex marriage were not entitled to about 1,100 Federal benefits, including those under health and retirement plans. DOMA also laid the groundwork for states to decide individually if they wanted to recognize a same-sex marriage, even though the Federal Government would not.
The recent ruling by the Supreme Court deemed that the portion of DOMA that defined a marriage as a union between one man and one woman was unconstitutional, stating that DOMA operates to deprive same-sex couples of [these] benefits and responsibilities and…By doing so it violates basic due process and equal protection principles applicable to the Federal Government.”
To be clear, this ruling did NOT legalize same-sex marriage in all 50 states. Currently, there are only 13 states that have legalized same-sex marriage. It simply ruled that not recognizing a same-sex marriage that had been recognized by a state, and therefore denying benefits, was unconstitutional at the Federal level.
As a direct result of the ruling, couples who are married in a state that recognizes same-sex (recognizing states) marriages will now be entitled to all the Federal rights and benefits afforded to married couples of different genders.
The ruling creates a sizeable area of regulatory uncertainty, however, when it comes to Federal benefits afforded to couples who reside in states that do not recognize same-sex marriages (non-recognizing states). For example, if a couple is married in New York (a recognizing state) and then moves to Georgia (a non-recognizing state), the Federal government will recognize the marriage, however, the State of Georgia will not. These uncertainties and questions have not yet been answered, and will require regulatory and judicial guidance.
For employers, the implications of the ruling on DOMA are considerable, and do not stop at their retirement plans. Federal healthcare regulations are equally as complex, and will be equally as affected by the ruling. For plans, the areas most impacted will be those that rely on the word spouse:
- Spousal Death Benefit: Under DOMA, plans could not pay a death benefit to a beneficiary other than a participant’s spouse, unless that spouse consented. After the ruling, the same rule will apply to same-sex married couples. In Defined Benefit plans, same-sex spouses will now be entitled to pre-retirement survivor annuities as well.
- Rollovers: Previously, same-sex spouses entitled to receive a death benefit distribution from a tax-qualified retirement plan was limited to rolling over the distribution to an inherited IRA. Now, same-sex spouse entitled to these benefits can make a rollover to an employer plan, as well as other retirement vehicles.
- Hardship Distributions: The rules for requesting hardship distribution for medical, tuition or funeral expenses, can now apply to same-sex spouses. They no longer have to be listed as a primary beneficiary of the participant to receive these distributions.
- Minimum Required Distribution: This policy states that spouses of deceased plan participants (with a tax-qualified retirement plan) can choose to delay beneficiary-related distributions for a longer period of time than non-spouse beneficiaries. Same-sex spouses can also take advantage of this as well.
- Qualified Domestic Relations Order: Divorcing same-sex couples can apply for a domestic relations order that requires the payment of a participant’s benefit to the spouse or their children.
- Plan Loans: Same-sex spouse consents will now be required for tax-qualified retirement plants that need spousal consent for participant loans.
Two Areas of Uncertainty
The impact of these changes is clear for plans that are based in recognizing states AND only have employees who reside in recognizing states. What is unclear is what the impact will be for plans that are based in non-recognizing states, but that cover employees who reside in states that do recognize, or more confusing yet, employees that live in both states that do and don’t recognize.
Consider the following:
- Company A is headquartered in Massachusetts and has employees who reside in Massachusetts, Rhode Island, and Connecticut (all recognizing states). Employees and their same-sex spouses will be entitled to all the same benefits and rights under the plan as married couples of different genders.
- Now consider that an employee from Company A accepts a position with Company B, which is headquartered in Florida and only has employees who reside in Florida and Georgia (both non-recognizing states). The State of Florida does not recognize the marriage of the relocated couple, however, the Federal Government still does. So how does Company B then handle this participant when it joins their plan?
While we do not know for sure how the inconsistencies will be worked out, we do know that the primary Federal Agencies who will oversee the implementation of these changes, the Department of Labor and the Internal Revenue Service, tend to favor uniformity. Given that the benefits provided under retirement plans are protected by Federal Law, we can easily see the IRS and DOL taking the position that so long as a couple has a valid marriage license issued by a recognizing state, that an employer in a non-recognizing state would need to recognize it and extend benefits provided under Federal Law. It should be noted that the Federal Government is the largest employer in the country, operating in every state, and itself will struggle with how to implement the new rules.
Another area of concern (and potentially a more costly one) is the potential for retroactive litigation. Typically when a law is deemed unconstitutional, it is considered to have been so since its inception. With no reason to assume that DOMA will be any different, plan sponsors have now been put in an uncomfortable position. While the IRS and DOL are likely to grant sponsors relief from any regulatory or enforcement action, they do not have the authority to prevent a party from taking legal action against a plan sponsor for having not provided benefits when they should have. We are almost certain to hear more on this aspect of the ruling in the coming months.
Ultimately, with 13 states recognizing same-sex marriages, 35 states with laws or constitutional amendments prohibiting them, and 2 states undecided on the issue, the only thing that is clear is that this debate has now reached a point where it will need to be addressed. Further litigation is almost inevitable, and regulatory clarification will be critically necessary. Unfortunately, we can see activity on both fronts far into the future.
So as a plan sponsor what should you do?
One of the more interesting aspects of the changes resulting from this ruling will be the way employers choose to implement them. We read one article that suggested that employers who have employees requesting benefits for their same sex couples should ask to see the marriage certificate. While that seems logical, unless that employer diligently requests to see the marriage certificate of all of its employees whose spouses receive benefits, they are looking at a potentially discriminating act.
Further complicating the matter is that, while now legal in many states, same-sex marriage is not universally accepted, making privacy extremely important. Bottom line, before an employer can contemplate the implementation of the specific changes warranted by the DOMA ruling, many will likely need to familiarize themselves with an entirely new set of social norms and develop internal management policies where appropriate.
In terms of specific steps, the answer varies by state, and for the most part, guidance remains unclear. While regulatory clarification has been promised quickly, as with many things related to the Federal Government, it probably won’t be as quick as we need. In the interim however, there are several things that all employers can do:
- Don’t ignore it or assume it does not affect your organization. Just because you have not yet been notified by an employee that they are legally married to a member of the same sex, does not mean that you won’t “ especially if your plan is based in a non-recognizing state.
- If you haven’t already done so, now would be a good time for the management of the organization to develop a policy on how same-sex couples will be handled within the company. DOMA may only affect certain benefits, but in order to obtain these benefits, your employee will be notifying you of their sexual orientation. It would be prudent to insure that your company is ready to handle that information.
- There will likely be two paths taken by sponsors in terms of communicating the changes to employees “ those who choose to proactively notify their employee base and invite employees of same-sex marriages to come forward, and those who will choose to implement the changes, but not make a public statement about it. This decision is one that should be left up to the individual companies and their management.
We will be contacting our clients to assist them with this implementation, and subsequent publications will be issued as regulatory guidance becomes available.