Windsor establishes that legally sanctioned same-sex marriages are to be treated the same under federal law as opposite-sex marriages. Same-sex marriages will now be entitled to the same federal benefits available to other married couples.
However, the Supreme Court did not strike down Section 2 of DOMA, and thus left open the possibility that in a state that does not recognize a same-sex marriage, individuals in same-sex marriages are not considered married.
Prior to Windsor, same-sex marriages were not recognized as legal marriages for federal purposes, even in states* where such marriages are legal. As a result, tax exclusions available to spouses under federal tax rules were not available to same-sex spouses.
Same-sex marriage has been legalized in 13 states and the District of Columbia: California (2008/2013*), Connecticut (2008), Delaware (2013), Iowa (2009), Maine (2012), Maryland (2013), Massachusetts (2004), Minnesota (2013), New Hampshire (2010), New York (2011), Rhode Island (2013), Vermont (2009) and Washington (2012). Washington, D.C. began issuing same-sex marriage licenses in 2010.
*In 2008 the Supreme Court of California legalized same-sex marriage, a few months later in 2008 proposition 8 was voted on and passed. Proposition 8 suspended same-sex marriages. On June 26, 2013, the Supreme Court dismissed attempts to uphold the law and same-sex marriages were able to resume in California.
Implications for employers
Windsor has implications for:
- Companies providing health benefits to employees’ spouses
- Employers providing qualified retirement benefits to employees
The IRS and Treasury Department are expected to provide guidance on how Windsor applies to benefits provided in the past.
There are many open issues. For example, it is not yet clear whether employers will be required to change the taxation of health benefits in states that recognize same-sex marriage or to amend prior year Forms W-2 to report same-sex spousal benefits, provided on a taxable basis, as excluded from income.
While there are open issues for current employer benefit plans, mostly revolving around the treatment of a same-sex marriage in a state that does not recognize same-sex marriages, employers will need to react quickly to any guidance and the changes dealing with retirement plans.
Windsor may have significant repercussions on the administration of a qualified retirement plan governed under section 401(a). Qualified retirement plans only cover employees, but spouses have a number of rights under retirement plans.
- Qualified joint and survivor annuities
Under defined benefit retirement plan rules, the plan must offer a qualified joint and survivor annuity to a married participant and spouse as the normal form of benefit. Spousal consent is required to permit any other form of distribution. Before making any distribution from a qualified plan, the employer or plan administrator always needs to determine whether the employee is married.
In a state that permits same-sex marriages, employers need to be careful to obtain updated information from the employee about the existence of a spouse, before making any distribution.
In a state that does not recognize same-sex marriages, it is not yet clear whether a distribution to an employee married to a same-sex spouse will be subject to spousal consent.
Given the cost of mistakenly distributing without spousal consent, a few employers have taken the precaution of halting or slowing new distributions under defined benefit plans until the IRS issues guidance on the new definition of spouse for federal tax purposes.
Because Windsor has a retroactive effect, it is not yet known what happens to prior defined benefit plan distributions made to employees with same-sex spouses but made without spousal consent. Because the distributions were legal and permitted at the time, it seems likely that the distributions would be upheld.
- Qualified pre-retirement survivor annuity
Distributions on death of an employee before retirement are given to the spouse unless the spouse has consented to a distribution to another beneficiary.
If the employee dies post-Windsor, the employer needs to determine whether the employee was married under the federal definition of marriage before making distributions to other designated beneficiaries.
- Qualified domestic relations orders (QDROs)
Same-sex spouses in states that recognized same-sex marriages will now be able to obtain a QDRO splitting the accrued retirement benefit between the two spouses, after a divorce. It is not yet clear whether the same rule would apply in a state that does not recognize such marriages.
Further guidance may be needed to determine whether a QDRO can be obtained for a pre-Windsor divorce.
In most defined contribution plans, an employee cannot name a non-spouse beneficiary without consent of the spouse. The employer or plan administrator will need to determine whether the employee has a spouse before making any death distribution. It is possible that the change in the law will invalidate any earlier beneficiary designation if the employee is now recognized as married.
In some defined contribution plans, spousal consent is required before a plan loan can be taken. As with the distribution spousal consent rules above, it is important to determine whether the employee has a spouse, and to obtain the spouse’s consent before giving a loan.
Health insurance plans
An employer is not required to offer health plan coverage to spouses or to domestic partners. Some employer health plans already offer coverage to same-sex spouses, while other companies only offer coverage to spouses.
If a plan currently offers coverage to opposite-sex spouses, it appears likely that the plan must now offer the same coverage terms and conditions to same-sex spouses (at least in the states where a same-sex marriage is recognized). It is currently not clear whether this will be considered a change in family status (giving the employee and spouse the right to make a new benefit election for the rest of the year).
Prior to Windsor, employers offering health plan coverage to a spouse in a same-sex marriage had to treat the value of non-spouse coverage as taxable compensation to the employee. Going forward, it appears that the federal tax treatment no longer applies—at least in the states that recognize same-sex marriage. Some companies are moving to change their payroll systems soon to treat the cost of current coverage to a same-sex spouse (at least in states that recognize the marriage as valid) as excluded from income.
If a same-sex spouse is covered under a health plan and is now recognized as a spouse for federal tax purposes, the spouse has rights to COBRA coverage on a qualified loss of coverage, like any other spouse. Employers will need to determine who is married for purpose of COBRA coverage in order to send the correct notices.
After Windsor, there is a lot of uncertainty for employers offering health and retirement plans. The IRS is working on guidance, but there are some steps that employers and companies can take even before guidance is released.
- First, companies can review their health plan documents to determine the current eligibility rules. If the plan is currently available to employees and “spouses,” additional steps may be needed to offer the plan to newly eligible spouses. If the plan is currently available to a broad array of domestic partners, the plan and plan administrator need to start determining which partners are married and which are not.
- Second, employers need to determine that retirement plan distributions and loans to employees are subject to clear (or clearer) questions about whether the employee is married. The spousal consent regulations permit an employee to certify that he or she is not married. Presumably no distribution or loan can be made without such a certification from the employee.
While there are privacy concerns that must be respected, it is nevertheless important that employers determine whether employees are legally married, so that the employer offers the health plan to any person who has a legal right to be the plan.
Although many of the issues will require further guidance, companies can plan ahead and identify areas where their plans or plan procedures may need to be updated or strengthened.
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
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