On June 26, 2013, the United States Supreme Court issued one of its most highly anticipated decisions in United States v. Windsor. In that opinion, the Court ruled that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional because it violates the Fifth Amendment’s guarantee of equal protection. Section 3 had limited the terms “marriage” and “spouse” to opposite-sex couples for purposes of all federal laws. As a result, same-sex marriages that are valid under state law now must also be recognized for federal law purposes.
While on the surface this appears to be a primarily social issue, the Windsor decision will also have major implications for the operation of employee benefit plans, as they are principally governed by the Code and the Employee Retirement Income Security Act (ERISA), both federal laws.
When analyzing the effect of the Windsor decision on employee benefit programs, it is first important to realize what the decision did do and what it did not do. The constitutionality of Section 2 of DOMA, which allows states to refuse to recognize same-sex marriages performed in another state, was not at issue in Windsor. Thus, headlines indicating that the Windsor decision “legalized gay marriage” are misleading. Rather—at least for now—the Supreme Court has left the decision regarding whether to permit same-sex marriage to each of the individual states. The Windsor decision simply requires those same-sex marriages which are valid under state law to be recognized for federal law purposes.
Similarly, it is important to recognize what we do know at this point and which questions remain unanswered. There are a number of outstanding issues on which guidance is needed from the federal agencies who enforce the federal laws affected by Windsor. The two chief issues relevant to employee benefits (namely, which state’s laws control for purposes of determining whether a particular same-sex marriage is valid, and to what extent the Windsor decision is retroactive) will be discussed later in this Article.
Windsor’s Effect on Employee Benefit Programs
While DOMA was not generally regarded as a benefits law, it had a significant impact on the benefits community. Likewise, the decision in Windsor to strike down Section 3 of DOMA will have a major impact as well. While most of the changes outlined below will benefit same-sex couples, that is not always the case. One example that will affect both retirement and welfare benefits is the impact of the decision on controlled group analyses. Under the Code’s family attribution rules, an individual is deemed to possess an ownership interest which is held by that individual’s spouse. Consider the case of same-sex spouses who each own a business: Prior to Windsor, these businesses were unrelated, but now they are treated as a controlled group, which could lead to myriad compliance issues.
- Windsor’s Effect on Retirement Plans
There are a number of rules in the retirement plan universe that must now recognize same-sex spouses:
- Surviving Spouse Benefits and other Spousal Protections: Probably the most obvious rules that apply differently in the case of married individuals are surviving spouse benefits and other related spousal protections. A married participant in a plan subject to the Code’s funding requirements (generally defined benefit plans, but also certain defined contribution plans) is required to receive a qualified joint and survivor annuity (QJSA) or a qualified optional survivor annuity (QOSA) with the participant’s spouse as joint annuitant, unless the participant’s spouse consents to an alternative form of distribution. Pre-Windsor, since a participant with a same-sex spouse was treated as single, the participant would have received a single life annuity, and his or her spouse’s consent would not have been required. Post-Windsor, the same participant is treated as married, and therefore must receive a QJSA or QOSA unless the participant’s newly recognized same-sex spouse consents to a different form.
Plans subject to these QJSA/QOSA rules must also offer a qualified pre-retirement survivor annuity (QPSA) for spouses of married participants who die prior to retirement. The QPSA is essentially equivalent to the survivorship portion of the QJSA that the spouse would have received if the participant had commenced benefits prior to death. However, many of these plans do not provide any survivor benefit in the case of single participants, which included participants with same-sex spouses before Windsor. Now, these same-sex spouses will enjoy the protection of a QPSA.
Defined contribution plans not subject to section 412 are exempt from the application of these QJSA/QOSA/QPSA rules if those plans provide that a participant’s surviving spouse will receive 100% of the participant’s vested account balance upon the participant’s death (unless the spouse consents to an alternate beneficiary). Prior to the Windsor decision, this protection was not extended to same-sex spouses. Now, same-sex spouses of deceased participants in such plans will have the right to receive the participant’s entire vested account balance unless that spouse consents otherwise.
- Beneficiary Designations: In plans subject to the survivorship rules above, a spouse must consent to the designation of any other beneficiary. In addition, almost all retirement plans provide a default beneficiary structure that begins with a surviving spouse. Same-sex spouses must now be taken into account for these purposes.
- Delayed Required Minimum Distributions: Surviving spouses of married participants enjoy some relaxed timing for distributions from defined contribution plans under the Code’s required minimum distribution (RMD) rules. These rules, which govern when distributions under a retirement plan must begin, generally use the “Uniform Lifetime Table” based upon the age of the employee. However, if the sole beneficiary is the participant’s spouse, the maximum period for distribution is the longer of the distribution period that would apply for a single participant or the distribution period determined based upon the couple’s joint life and last survivor expectancy. This lengthens the maximum period over which RMDs must be made (thereby decreasing the amount of each RMD), which has the effect of further deferring taxation on these amounts and allowing for additional tax-advantaged growth. In addition, if the participant dies before distributions begin, a surviving spouse may defer commencement of payments until the end of the year in which the employee would have attained age 70½, as opposed to beneficiaries of single participants who must either begin to receive distributions (to be paid over the beneficiary’s lifetime) by the end of the year following the year of the participant’s death, or receive a distribution of the entire account within five years. After Windsor, same-sex spouses will also qualify for this advantageous RMD treatment.
- Minimum Death Incidental Benefit Rule: The minimum death incidental benefit (MDIB) rule provides limitations on the maximum length of an annuity which may be paid to a participant and his or her annuitant where the age difference between the two exceeds a certain threshold. The policy behind this rule, similar to the RMD rules, is to ensure that retirement benefits are used primarily as retirement income and not for estate planning purposes. However, the MDIB rule is deemed satisfied where the participant’s sole beneficiary or joint annuitant is his or her spouse. Prior to Windsor, the MDIB rule had the potential to limit the forms of benefit payable to a participant with a same-sex spouse, because that participant was treated as single. Post-Windsor, the same-sex spouse provides an exception to this rule.
- Rollover Options: The spouse of a deceased participant may roll an inherited benefit over to any eligible retirement plan or IRA as if the spouse were the participant. A nonspouse beneficiary may also roll over an inherited benefit, but only to an “inherited IRA,” which is subject to substantial restrictions on subsequent rollover and RMDs. Post-Windsor, same-sex spouses will qualify for the more favorable spousal rollover options.
- Hardship Distributions: Defined contribution plans may (but are not required to) provide for distributions on account of hardship. Those that do so are permitted to allow for distributions based upon not only a hardship of the participant, but also for medical, tuition, or funeral expenses incurred by the participant’s spouse or primary beneficiary. Because same-sex spouses were not recognized prior to Windsor, a participant could only take a hardship distribution based upon the hardship of a same-sex spouse if that spouse was named as the participant’s primary beneficiary (and the plan allowed for such beneficiary hardship distributions, which many do not). After Windsor, this is no longer necessary, so the participant can name a different beneficiary without limiting his or her ability to take a hardship distribution based upon the hardship of the participant’s spouse.
- Qualified Domestic Relations Orders: The qualified domestic relations order (QDRO) rules in the Code and ERISA provide an exception to the anti-alienation provisions of those laws, so that a portion of a participant’s retirement benefit can be assigned to provide support to a spouse, former spouse, child, or other dependent, generally as a result of a divorce. Thus, prior to the Windsor decision, the same-sex spouse of a participant could only be awarded a portion of the participant’s retirement benefit by a QDRO if he or she could qualify as an “other dependent,” which was not often the case. Following Windsor, a QDRO may assign a portion of a participant’s benefits to his or her same-sex spouse or former spouse without the need to demonstrate dependent status.
- Windsor’s Effect on Health and Welfare Benefits
The decision will arguably have an even more substantial impact on health and welfare benefits offered by employers:
- Employer-Sponsored Group Health Plans: Employer-provided health benefits are generally excludable from an employee’s income, including coverage provided to the employee’s spouse and dependents. Prior to Windsor, some employers had already begun providing health benefits to same-sex spouses. However, since these individuals were not recognized as spouses under the Code, the value of the coverage was required to be imputed to the employee as taxable income, unless the same-sex spouse could also qualify as a dependent (again, most did not). The same was true for the children of the same-sex spouse, although the children often qualified as dependents of the employee as well. This imputed income also resulted in payroll taxes for both the employee and the employer.
- Cafeteria Plans: In addition to being relieved of the tax on the employer-provided portion of health coverage for a same-sex spouse, an employee may now use pre-tax payroll deductions through a cafeteria plan to pay for his or her share of that coverage. Prior to Windsor, the employee had to pay for such coverage on an after-tax basis.
- HIPAA Special Enrollment Rights: Generally, employees are only allowed to enroll in a health plan during a limited “open enrollment” period prior to the beginning of each plan year. However, special enrollment rights provided by the Health Insurance Portability and Accountability Act (HIPAA) permit participants to enroll a new spouse mid-year, or to change coverage elections in connection with a change in marital status, loss of coverage under a spouse’s plan, or addition of a dependent. A same-sex spouse will now be treated as a spouse for purposes of these rules. In addition, although further guidance would be welcome, it appears that this will permit the mid-year addition of same-sex spouses in the 2013 plan year based upon their newly-recognized status, even if the actual marriage took place years ago.
- Health FSAs, HRAs, and HSAs: Employees with a Health Flexible Spending Account (Health FSA), Health Reimbursement Arrangement (HRA), or Health Savings Account (HSA) may seek reimbursement for qualifying medical expenses of the employee as well as the employee’s spouse and dependents. Following Windsor, the qualifying medical expenses of a same-sex spouse (and the spouse’s children, who will now be considered step-children and dependents of the employee) may be reimbursed under any of these arrangements.
Then again, in order to be eligible to contribute to an HSA, an employee generally must be covered under a high deductible health plan (HDHP) and must not have any nonHDHP coverage. NonHDHP family coverage of an employee’s spouse is taken into account for these purposes, unless such coverage does not cover the employee. Thus, after Windsor, an employee’s ability to participate in an HSA could potentially be jeopardized by a same-sex spouse’s nonHDHP family coverage.
- COBRA: A same-sex spouse covered under an employer’s group health plan is now potentially a COBRA qualifying beneficiary. This means that if the same-sex spouse experiences a COBRA qualifying event, he or she will have an independent right to elect COBRA continuation coverage.
- Dependent Care FSAs: The effect of the Windsor decision on dependent care programs is a double-edged sword. On one hand, an employee may now seek reimbursement for expenses relating to a same-sex spouse’s children who would not otherwise qualify as dependents of the employee, as well as a same-sex spouse who is incapable of self-care. On the other hand, the same-sex spouses will now be treated as a married couple, so their combined limit on contributions to a dependent care FSA are now limited to $5,000 (or $2,500 each if they elect to file separately). When the spouses were treated as single, each could have contributed $5,000.
- FMLA: The Family Medical Leave Act (FMLA) permits an employee to take unpaid leave to care for a family member with a serious health condition, including the employee’s spouse. As a result of the Windsor decision, employees can now take FMLA leave to care for a same-sex spouse with a serious health condition.
- Employer Shared Responsibility Provisions: Under the employer shared responsibility provisions of the Patient Protection and Affordable Care Act (the “ACA”), large employers must offer minimum essential coverage to at least 95% of their full-time employees and their dependents. After Windsor, the children of a same-sex spouse will be considered step-children, so they will qualify as dependents of the employee and must be taken into account for purposes of this determination.
There are a number of questions relating to the Windsor decision for which we are still waiting for answers. The two principal issues that have arisen are (1) which state’s law controls when a same-sex couple is married in a state that permits it but resides in a state that does not recognize their marriage, and (2) to what extent is the effect of the decision retroactive?
- Determining Whether a Same-Sex Marriage is Valid Under State Law
Perhaps the biggest open issue since the issuance of the Windsor decision has been how to determine whether a given same-sex marriage is valid under state law. To a large degree, recent guidance has resolved this issue; yet certain aspects remain problematic.
The simplest situation involves a same-sex couple who both marries and resides in a state that recognizes their marriage. Clearly, after Windsor, this couple must be treated in the same manner as an opposite-sex couple for employee benefits purposes. However, only 13 states and the District of Columbia currently permit same-sex marriage. This lack of uniformity creates the potential for a same-sex couple to be legally married in a state which permits it, but to reside in a state that does not recognize their marriage. So, the question becomes: Which state’s law controls?
At this point, two competing schools of thought have come to the forefront. Under the “state of celebration” rule, if a same-sex couple is legally married in a state that permits it, then they are treated as married, regardless of where they reside. Under the alternative “state of residence” rule, the same-sex couple is treated as married if their marriage is recognized by the state in which they reside. Note that if a same-sex couple can pass the state of residency test, they will necessarily pass the state of celebration test, because they must first be married for their state of residency to recognize that marriage.
Thus far, the state of celebration test seems to be gaining the most momentum. The Office of Personnel Management (OPM), which administers the benefit programs for most federal employees, first adopted the state of celebration rule. The Service recently followed suit, issuing guidance explicitly adopting this rule. Revenue Ruling 2013-17 provides that “[f]or Federal tax purposes, the Service adopts a general rule recognizing a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex, even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.” The Service has also promised to issue additional future guidance for employer plans. Even more recently, the Department of Labor (DOL) joined these agencies, opting for the state of celebration rule in Technical Release 2013-04. This is welcome guidance for most plan administrators because it provides a much higher degree of certainty and uniformity in operation.
However, the application of the DOL’s position in Technical Release 2013-04 is limited to the exercise of its authority under Title I of ERISA, the Code, and DOL regulations at chapter XXV of Title 29 of the C.F.R. Notably, this new guidance does not extend to FMLA determinations, with respect to which the DOL has previously adopted the state of residency rule. The DOL’s FMLA regulations state that “[s]pouse means a husband or wife as defined or recognized under State law for purposes of marriage in the State where the employee resides….” This state of residency rule provides challenges for employers, even ignoring any difficulties resulting from a conflict with the Service position and the DOL’s own position on other employee benefits matters. Employers will need to analyze FMLA leave on a case-by-case basis for employees who request leave to care for a same-sex spouse. An employer might adopt a policy of recognizing all same-sex spouses as spouses for FMLA purposes, regardless of their state of residency, in order to appease employees or in an attempt to simplify administration. However, if an employer grants leave to care for a same-sex spouse and the couple does not live in a state that recognizes their marriage, this does not qualify as FMLA leave under the regulations, and cannot be counted against the 12-week maximum for the employee. Therefore, even employers with such uniform policies will either need to track FMLA leave on an individual basis based upon the employee’s state of residence, or accept that they will not be able to enforce the 12-week maximum for employees with same-sex spouses.
One thing that is very clear from the text of the Windsor opinion, as well as subsequent guidance, is that a same-sex couple must actually enter into a lawful marriage for any federal law to treat them as spouses. The ruling does not apply to domestic partnerships, civil unions, or similar formal relationships recognized under state law.
- Retroactive Application of Windsor
Generally, when the Supreme Court declares a law unconstitutional, it is void retroactively to its date of adoption. However, retroactive implementation could be quite complicated, if not impossible, in the context of certain employee benefits programs. For example, is a plan administrator obligated to offer a retroactive QJSA to the same-sex spouse of a participant who has been receiving a straight-life annuity? Revenue Ruling 2013-17 provides some guidance on the retroactive application of Windsor for Code purposes. The holdings of the Ruling apply prospectively beginning on September 16, 2013. Affected taxpayers may, but are not required to, file an amended return for previous years. However, the Ruling limits this to open years within the meaning of section 6511. In addition, “[t]axpayers may rely … on this revenue ruling retroactively with respect to any employee benefit plan or arrangement or any benefit provided thereunder only for purposes of filing original returns, amended returns, adjusted returns, or claims for credit or refund of an overpayment of tax….“ Thus, a taxpayer may not, for instance, demand retroactive surviving spouse benefits from a plan administrator based upon the Revenue Ruling.
The Service has indicated its intent to issue future guidance on the retroactive application of Windsor. It has promised that such guidance will take into account consequences to all stakeholders and will “provide sufficient time for plan amendments and any necessary corrections so that the plan and benefits will retain favorable tax treatment for which they otherwise qualify.” Thus, for now, we wait.
Action Items for Employers
While many questions still remain, it is important for employers to take a proactive approach to complying with the Windsor decision. Key action items include:
- Review benefit plan documents, especially determining where terms such as “spouse” or “marriage” are defined and whether existing definitions violate Windsor.
- Develop a process to identify same-sex spouses. Note that this could be a sensitive topic and should be handled delicately. Implementing a process consistent with the method for identifying opposite-sex spouses should minimize potential issues.
- Employers who have been treating the value of health coverage provided to same-sex spouses as taxable income should cease doing so, effective immediately.
- Identify any additional issues for which you require clarification and contact your benefits attorney.
Article written by Brian Gallagher. Originally published in “Michigan Tax Lawyer” Volume XXXIX, Issue 3, Fall 2013. Brian Gallagher is an attorney in the Employee Benefits Practice Group at the Fraser Trebilcock law firm in Lansing.
 In Windsor ‘s companion case, Hollingsworth v. Perry, 133 S. Ct. 2652 (2013), the United States Supreme Court ruled that supporters of California’s ban on same-sex marriage lacked standing to appeal the decision of the lower court which found the ban unconstitutional. However, numerous similar cases are pending around the country (including one in Michigan, DeBoer v. Snyder, No. 12-cv-10285, (E.D. Mich. filed January 23, 2012)), which would lead one to reasonably conclude that the United States Supreme Court will eventually rule on the issue.
 See, e.g., OPM Benefits Administration Letter No. 13-203 (July 17, 2013), available at http://www.opm.gov/retirement-services/publications-forms/benefits-administration-letters/2013/13-203.pdf (indicating that, at least for employees covered by federal benefits programs, “[b]ecause existing same-sex marriages were not recognized by the Federal government before this Supreme Court decision, all legal same sex marriages that predate the decision are being treated as new marriages.”).
 This is the case, at least, where federal law dictates that spouses must be afforded certain treatment. However, there are other areas where federal law permits, but does not require, certain benefits (e.g., health coverage) to be extended to spouses of participants. Absent further guidance, it appears that one could limit these permissive benefits to opposite-sex spouses through careful drafting, at least in most states. There is no federal law that prohibits discrimination on the basis of sexual orientation in the private sector (although employees of the federal government are protected), and the majority of states (including Michigan) either do not have a law prohibiting such discrimination or limit its application to public employers. It would not be surprising to see future litigation in this area.
 These jurisdictions include Massachusetts, Connecticut, Iowa, Vermont, New Hampshire, the District of Columbia, New York, Washington, Maine, Maryland, Rhode Island, Delaware, Minnesota, and California. Other states recognize same-sex marriages performed in another state, but do not allow it under the laws of their state.
 OPM Benefits Administration Letter No. 13-203, supra, note 32 (“Benefits coverage is now available to a legally married same-sex spouse of a Federal employee or annuitant, regardless of the employee’s or annuitant’s state of residency.”).
 Ironically, the DOL itself highlights these concerns in Technical Release 2013-04 (“A rule … based on state of domicile would raise significant challenges for employers that operate or have employees … in more than one state or whose employees move to another state while entitled to benefits. Furthermore, substantial financial and administrative burdens would be placed on those employers….”).
 16A Am. Jur. 2d Constitutional Law § 195 (“Since unconstitutionality dates from the time of [a law’s] enactment and not merely from the date of the decision so branding it, an unconstitutional law, in legal contemplation, is as inoperative as if it had never been passed and never existed; that is, it is void ab initio.”).