On June 26, 2013, the Supreme Court of the United States overturned Section 3 of the Defense of Marriage Act (“DOMA”) in United States v. Windsor. Prior to the Supreme Court’s decision, Section 3 of DOMA, a federal law, had defined marriage as the union between one man and one woman. Therefore, under DOMA, a same-sex couple who had been married in a state legally recognizing same-sex marriage would still be considered single under federal law, creating numerous challenges for same-sex spouses and their employers. Section 3 of DOMA has been overturned by the Supreme Court for a violation of Fifth Amendment personal liberty protections; the Court also recognized that marriage is a matter traditionally regulated by the states. Indeed, Section 2 of DOMA, which permits individual states to deny recognition of same-sex marriages formed in other states, still remains in force. Following the Court’s decision, same-sex marriages that are formed in states allowing same-sex marriage, like Minnesota, will now be recognized by the federal government, but there will still be complications when same-sex spouses live or work in states that do not recognize such unions.
According to the General Accounting Office, DOMA’s marriage definition impacted over 1,100 federal laws, so the Supreme Court’s decision will have a substantial impact. Here, we will look at a few of the key ways the decision will impact businesses and individuals in the areas of estate planning, tax, employment practices and employee benefits.
Effect of the DOMA Decision on the Minnesota Marriage Equality Act
On August 1, 2013, the Minnesota Marriage Equality Act goes into effect, allowing same-sex couples to marry within the state. Couples who elect to marry under the new Minnesota law will now have their marriages recognized by the federal government as well, permitting them access to health and retirement benefits, employment benefits, and the marital tax exemption that had previously been denied to same-sex couples.
Marriages formed in Minnesota may not receive the same recognition from other states that do not legally recognize same-sex marriages. Married same-sex couples may not, for example, be eligible for divorce if they move to a state that does not recognize their marriage, and employers in other states may not be required to grant spousal health benefits if the relevant plan is subject to state law. Conversely, under Minnesota’s law, marriages from other jurisdictions where same-sex marriage is legally recognized will be recognized in Minnesota, effective August 1, 2013.
Tax and Estate Planning
Joint filing of income taxes can create substantial savings for married couples, yet under DOMA, couples in state-recognized same-sex marriages were eligible for joint filing within their state while still required to file as single with the IRS. Even more confusingly, some state returns borrow from the filer’s federal returns, so couples were required to file a mock joint federal return with the state to accompany their state tax return, while also filing individual federal returns. Now, all couples married and employed in Minnesota will be able to file jointly for both state and federal returns. Should a same-sex couple be married in Minnesota and then subsequently need to file in another state that does not recognize same-sex marriage, that state may require the spouses to file as individuals even if they file jointly with the IRS.
Married couples are also eligible for the unlimited marital estate tax exemption, which allows a person to leave his or her entire estate to a spouse without paying tax on the transfer. Without the marital exemption, any amount above $5.25 million is subject to federal estate tax. Same-sex couples may now avoid tax on spousal estate transfers, regardless of their size.
Employment Practices and Employee Benefits
Employers are now permitted by federal law to grant same-sex spouses the same benefits that are available to all other spouses with the accompanying favorable tax treatment. The biggest impact will be on retirement and welfare benefits subject to the Employee Retirement Income Security Act (“ERISA”), and employers will also be required to expand eligibility for leave under the Family and Medical Leave Act (“FMLA”).
Medical, Dental, Life and Disability Benefit Plans
Welfare benefit plans (which include medical, dental, life and disability coverage), Section 125 “cafeteria” plans and fringe benefit programs sponsored by Minnesota employers will likely be required to provide the same level of coverage to same-sex spouses (i.e., those who live in a state where their marriage is recognized as lawful and valid) that is available under the plan to spouses in heterosexual marriages. The particular terms of these plans should be reviewed and revised as appropriate. For plans with benefits provided through insurance, this result should be automatic, since Minnesota is permitted to regulate the terms of insurance and likely will require insurance issued in Minnesota to cover same-sex spouses. We anticipate that Minnesota will be issuing guidance on when these changes must be made.
For employers based in other states, these coverage requirements currently will depend upon whether or not those states recognize same-sex marriage.
Retirement Plans
Most employer-provided retirement benefit plans, including ESOPs, 401(k) plans and pension plans, are governed by ERISA, which broadly preempts conflicting state laws. Now that DOMA’s federal definition of a “spouse” has been changed, any “lawfully married” same-sex spouses (i.e., those who live in a state where their marriage is recognized as lawful and valid) should automatically be treated as the “spouse” for all retirement plan purposes, including beneficiary designations, the assignment of benefits under a “qualified domestic relations order,” and eligibility for any qualified joint and survivor annuities and qualified preretirement survivor annuities available to spouses under pension and certain other retirement plans. Employers should be aware of the impact on their plans and review (and potentially revise) the plan terms, distribution and beneficiary forms.
Tax Implications for Employers
Under DOMA, no federal tax benefits (including pre-tax or tax-free benefits) could be provided to domestic partners and same-sex spouses unless the partner qualified as the employee’s dependent. This has required employers with benefits programs that extend to domestic partners or same-sex spouses to make tax withholdings on benefits and to report taxable income for domestic partners and same-sex spouse benefits. Now, all federal pre-tax and tax-free benefits applicable to spouses will extend to any same-sex spouse who is considered “lawfully married” under the laws of the state in which the couple resides. For Minnesota employers, this means that federal income tax reporting and withholding will not be required for any same-sex employees who are Minnesota residents. However, it appears that federal tax reporting and withholding will continue to be required for any benefits provided to domestic partners or same-sex spouses whose marriage is not recognized in their state of residence.
Additional Changes
While tax, estate, and employment areas have widespread impact, there are many other aspects of federal law that affect marriages. Same-sex spouses will now be eligible for hospital visitations, social security benefits, spousal immigration petitions, and home protection from forced sale to pay nursing home bills.
We will continue to monitor any further developments on this issue, and continue to provide updates as we see the result of the Supreme Court’s decision being implemented.