Unconstitutionality of DOMA Impacts Employee Benefits

Posted by BAS - 27 June, 2013

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In a landmark decision yesterday, the Supreme Court held that Section 3 of the federal Defense of Marriage Act is unconstitutional. This ruling has a widespread impact on employers and the administration of their employee benefit plans.

The Federal Defense of Marriage Act (DOMA) became law in 1996. This statute defined marriage as a legal union between one man and one woman as husband and wife. DOMA also defined “spouse” as a person of the opposite sex. This law, which was drafted in just a few short paragraphs, had far-reaching implications. DOMA in essence required that benefits coverage extended by employers to non-dependent same-sex individuals had to be taxable to the employee. It also prohibited the extension of true COBRA coverage and HIPAA special enrollment rights to same-sex partners.

The Supreme Court's 5-4 decision in U.S. v. Windsor, which was published yesterday, finds that DOMA is unconstitutional as a violation of the due process clause of the Fifth Amendment which prohibits denying anyone the equal protection of the laws. The court found that DOMA was a "deprivation of the equal liberty of persons that is protected by the Fifth Amendment." The decision is based on the underlying argument that regulation of marriage is within state authority, and DOMA, as a federal law, uses a state-defined class to impose restrictions and inequality.

Edith Windsor was married to Thea Spyer, her same-sex partner, in Canada in 2007. When Spyer died in 2009, she left her estate to Windsor. Windsor was not permitted to take advantage of the estate tax exemption for surviving spouses since her marriage was not recognized under federal law. Instead, she had to pay $363,053 in federal estate taxes. She sought a refund from the IRS which was denied. She filed a lawsuit, and the case ultimately reached the Supreme Court.

Federal laws provide tax advantages and certain requirements under employee benefits plans to married people and spouses. With DOMA in effect, same-sex marriages were not recognized under federal law, and therefore spouses were not eligible for the spousal tax advantages or employee benefit rights.

Without the limitations of DOMA, individuals of the same sex who are married under state law will be treated as married for all federal purposes. This will impact federal laws governing taxation, Social Security benefits, employee benefits, ERISA, HIPAA, the Affordable Care Act, and many other federal rules and regulations.

Now, employers will have to recognize same-sex spouses as spouses for employee benefit plans, to the extent spouses have rights under federal law. This means federally-governed benefits, including certain tax advantages, death benefits and qualified joint and survivor annuities in retirement plans, COBRA and special enrollment rights under health plans, and qualified domestic relations orders or qualified medical support orders, among others, will be extended to same-sex spouses to the same extent they are extended to opposite-sex spouses. Payroll systems will have to be reviewed to apply the same tax treatment to same-sex married partners as is applied to opposite-sex married partners. In addition, when benefits are extended to same-sex married couples, the tax implications will be the same as the tax implications for couples of the opposite sex. No longer will income have to be imputed for the value of coverage provided to a spouse under state law who is the same sex as the employee. Employees themselves will want to change their withholding to identify as "married."

Only 12 states recognize marriage of same-sex individuals presently. An employer located in a state that does not recognize same-sex marriage will not necessarily have to recognize same-sex marriages entered into in other states.

This ruling does not require employers to extend benefits to spouses, nor does it require employers to recognized unmarried domestic partners. However, when spousal benefits are offered, an employer will no longer be able to point to DOMA to treat same-sex spouses differently than opposite-sex spouses.

The unconstitutionality of DOMA has wide reaching implications for all employers.

Topics: HR & Benefits Compliance


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