The Supreme Court’s decision to overturn the Defense of Marriage Act earlier this year seemingly left more questions than answers. Recently, one of the big unknowns was answered by the IRS, when it declared that legal same-sex marriages will be recognized for federal tax purposes regardless of the state of residency.
The IRS ruling states that legally married same-sex couples (not domestic partnerships or civil unions) will have the same access to benefits, protections, and responsibilities under federal tax law that heterosexual married couples have.
Importantly, every plan sponsor needs to be aware of this ruling and needs to begin to plan.
As a plan sponsor in a state that does not offer same-sex marriage, you might be thinking that you don’t have to prepare for this yet, but based on this ruling, that is now an incorrect assumption. If you have a plan participant that was legally wed to a same-sex partner in another state, this IRS ruling applies to them, regardless of where your offices are or where the participants reside. You will need to extend the same benefits to this same sex married participant even though the state where your plan was established may not recognize same sex marriages.
Double Edged Sword
The most interesting part of the original ruling, and now the subsequent IRS ruling, is that for many couples in same sex marriages, this right – for which many fought so hard – may turn out to be a double edged sword.
Just because same sex marriage is now legal, doesn’t mean it’s widely accepted. We are not too far removed from the memory of a time when being gay was potentially a reason for being terminated. There is some data to suggest that same sex married couples are not in any huge rush to share the news of their nuptials with their HR department. However, because of the IRS ruling, they may not have a choice.
First, the ruling requires that same sex married couples file either Married Filing Joint or Married Filing Separate for the current tax year. More interestingly, the ruling gives the couple the right (but does not require them) to amend their tax returns for the normal period under which tax returns can be amended. This could potentially open the door for revisiting how distributions and other transactions related to retirement plans were handled.
Moreover, there are basic plan functions that require knowing whether the participant is married or not. Take, for example, beneficiaries. In most cases, if the participant’s spouse is not the participant’s primary beneficiary, the spouse is required to sign a consent. Under the new ruling, a participant in a same sex marriage would have to list their spouse as their beneficiary, or have them sign a consent. Either way, the participant would need to disclose that they are married to a person of the same gender.
So while the theory of the IRS ruling is logical, in practice it could create some difficult situations for both employers and their employees. Withholding this type of information from an employer is no longer an optional voluntary omission; it could lead to some plan administration issues.
Next Steps For Employers
At the most basic level, many plan documents and policies may need to be updated to replace any mention of the words husband or wife with something more generic like spouse. Procedures and policies will need to be written where applicable. The changes will be fairly plan specific, and your advisor or vendor should be contacting you to assist you with this.
With that said, what is now clear is that these rulings will dictate that all organizations step back and determine how they will handle the matter of same sex marriages from a larger perspective. In other words, focusing only on what changes need to be made to what forms will be helpful, but if the employee doesn’t feel comfortable filling out the form and turning it in because they do not know how it will be received by HR, then the exercise was futile.
Considering the sensitive nature of the matter, it’s crucial that employers take extra care in determining exactly how their company will proceed to implement these changes. Management, in tandem with legal counsel, should have an in-depth discussion and create a policy that that works in order to accommodate all employees and plan participants, limit liability and avoid potential legal exposure. Some helpful questions to ask:
- What other benefit areas does this ruling impact? Ie: Health Insurance
- What privacy concerns exist?
- Will we require documentation of a same sex marriage? Should we require the same documentation for a marriage of a man and a woman?
- Should we proactively ask employees in same sex marriages to notify HR or will we wait for them to notify HR?
- How will we be announcing these changes in our policies to employees?