Impact of the Rejection of DOMA on Employers and Employees
In a recent Alert, we discussed the impact on same-sex couples of the Supreme Court decision to strike down Section 3 of the Defense of Marriage Act (“DOMA”). In this Alert, we are focusing on the impact of this decision on employers and employees. Here are some examples:
Health Care Benefits – As noted, employees can now exclude the value of spousal coverage in a health care plan, assuming the IRS recognizes the marriage. The employer will not need to withhold federal income and employment taxes on the benefit. However, employers may need to deal with differences in federal and state treatment of the coverage. This can happen if the IRS adopts a “place of celebration” rule, whereby same-sex marriages are recognized by the IRS even if a married couple moves to a state that does not allow same-sex marriages. In this circumstance, the employee could have state but not federal income equal to the value of the spousal benefit. The employer will then need to withhold state income tax on the benefit. Employers that included the value of health coverage for same-sex spouses in employees’ gross income should consider seeking a refund for FICA taxes paid on those benefits for taxes paid within the past three years.
Plans such as Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) will now permit employees to be reimbursed for the medical expenses of a same-sex spouse. In addition, same-sex spouses (and children of same-sex couples) will be able to remain insured under COBRA if an employee loses his or her job.
Retirement Plans – Spousal provisions in retirement plans, such as notice and distribution rules, should now apply to same-sex married couples in states where their marriages are recognized. For instance, the required form of benefit payments for married participants in a defined benefit plan is a qualified joint and survivor annuity (QJSA). This means that a portion of a participant’s pension will continue to be paid to surviving spouses. Spousal consent is needed for participants to elect out of the QJSA. Spousal consent is also needed if participants in a defined contribution plan such as a 401(k) chooses to leave any balance remaining at death to a nonspouse beneficiary.
Family and Medical Leave Act (FMLA)
The FMLA covers works of employers that have more than 50 employees. Employees who meet all of the qualifications (such as service of a year or more) can take 12 weeks of unpaid leave to care for a spouse with a serious health condition, and resume the same or an equivalent job after the leave. An employee married to a same-sex spouse, and living in a state that recognizes the marriage, will be considered married for FMLA purposes. For now, employees with same-sex spouses in states that do not recognize the marriage are unlikely to be covered for FMLA. This may change if the federal government adopts a “place of celebration” rule, rather than the “place of domicile” rule currently in regulations under FMLA.
Some employers may decide to revise their benefits policies relating to employees in domestic partnerships and civil unions and instead offer spousal benefits only to employees who are married. While employers may choose to offer equal benefits coverage to “marriage-like” relationships, they are under no obligation under the DOMA ruling to do so. Multistate employers could encounter difficulty in changing their payroll systems to deal with inconsistent state rules, and they may require outside assistance to correctly update the systems. To properly effect the changes needed to follow the DOMA decision, employers should consult with their accountants and attorneys and review their plan documents, employee manuals and benefits descriptions and forms.