fiduciary fitness | PLANADVISER July/August 2015

Same-Sex Marriage Ruling

The implications for employee benefit

By Marcia Wagner | July/August 2015
Art by Jun Kim

In a 5–4 landmark opinion issued June 26, the U.S. Supreme Court in Obergefell v. Hodges held that the 14th Amendment to the U.S. Constitution requires each state to allow a marriage between two people of the same sex and to recognize such marriages when they were lawfully performed in another state.

Under U.S. v. Windsor, the court’s 2013 decision regarding same-sex marriage issues, same-sex couples in states that recognized their marriage obtained marriage-based federal rights and benefits under employee benefit plans. However, Windsor did not address the validity of Defense of Marriage Act (DOMA) provisions that gave individual states the right to recognize, or not recognize, same-sex marriages of other states. Thus, Windsor required regulatory guidance about employee benefits for same-sex spouses in states that did not recognize same-sex marriage. The Internal Revenue Service (IRS) and Department of Labor (DOL) issued this guidance in the form of several rulings and releases stating that if a same-sex marriage was validly entered into in a state whose laws authorize same-sex marriages, it would be recognized under the Employee Retirement Income Security Act (ERISA) and the tax laws even if the couple resided in a state not recognizing the validity of their marriage.

Until the Obergefell decision, the court had not addressed the issues of whether states must perform same-sex marriages and whether they must recognize such marriages performed in other states. Both of these issues have now been emphatically decided in favor of allowing same-sex marriage, eliminating any legal distinction, in all states, between same-sex and opposite-sex married couples.

The impact of the latest Supreme Court decision on plan sponsors will depend on whether or not an employer currently offers benefits to same-sex spouses, the type of benefits it offers and the states in which it operates.

The IRS and DOL had already determined that, for purposes of federal taxes and ERISA, a same-sex marriage legally entered into in any state must be recognized, regardless of the couple’s state of residence. For federal tax and ERISA purposes, therefore, same-sex spouses are already treated in the same way as opposite-sex spouses, regardless of where they live, if the marriage was valid where performed. Thus, since the Windsor case was decided, employers have been subject to the federal mandate to treat same-sex married couples as married for retirement plan and federal tax purposes. Therefore, going forward, Obergefell should have no federal tax or ERISA impact on employers that maintain only a retirement plan.

However, like the Windsor decision, the Obergefell decision does not address whether it will apply retroactively for individuals who were validly married under the laws of any state prior to June 26. After Windsor, which required that same-sex marriages be recognized for federal purposes, the IRS issued guidance permitting employers to apply the new rules for tax purposes. It is now unclear whether affected states will be required to recognize, retroactively, a same-sex marriage entered into in a different state, or only beginning on the date of the court’s decision. At the moment, this appears to be a state-by-state determination.                  

If all of an employer’s workers live in states that had already recognized same-sex marriages, no change in its employee benefits practices may be required by the Supreme Court’s latest decision. For employees living in states that had previously not recognized same-sex marriages for state purposes, state tax treatment of health plan benefits will change. Previously, the coverage or benefits provided to a same-sex spouse who was not a legal dependent of the participant was generally treated as imputed income for state tax purposes and taxed at single taxpayer rates, even in states where coverage and benefits of opposite-sex spouses were not treated as income. Now, state income tax withholding will need to be adjusted to reflect that this coverage is not includible in income, and the employee will usually be taxable at married taxpayer rates.

In the case of benefits that are not required to be provided to spouses, such as spousal health plan coverage, employers that have been offering such benefits to opposite-sex spouses but not to same-sex spouses may be forced to either extend coverage to same-sex spouses or eliminate the coverage. Otherwise, they may be subject to both federal and state nondiscrimination laws.

Marcia S. Wagner is an expert in a variety of employee benefits and executive compensation issues, including qualified and nonqualified retirement plans, and welfare benefit arrangements. She is a summa cum laude graduate of Cornell University and Harvard Law School and has practiced law for 28 years. Marcia is a frequent lecturer and has authored numerous books and articles.