In June 2013, the United States Supreme Court ruled that the federal Defense of Marriage Act, which defines marriage as a union between one man and one woman, is unconstitutional. In essence, the court held that the Act denied same-sex couples the “equal liberty” guaranteed by the Fifth Amendment. This decision has far broader impact than just the scope of the estate-tax issues raised in the case, and employers and benefit providers should be aware of the impact and aftermath of this ruling.
The 1996 Defense of Marriage Act, or DOMA, was signed into law by President Bill Clinton and bars federal recognition of same-sex marriages for purposes such as Social Security survivors’ benefits, insurance benefits, immigration and tax filing. Section 3 of the law defined marriage as “a legal union between one man and one woman as husband and wife” and a spouse as “a person of the opposite sex who is a husband or a wife.” That provision had been struck down by eight lower courts before the 2013 Supreme Court’s 5-4 ruling in United States v. Windsor settled the matter. The Windsor decision means that legally married same-sex couples are now entitled to the same federal benefits as married opposite-sex couples.
The facts of the case
The state of New York recognized the marriage of New York residents Edith Windsor and Thea Spyer, who were married in Canada in 2007. When Spyer died in 2009, she left her entire estate to Windsor. Windsor sought to claim the federal estate tax exemption for surviving spouses but was barred from doing so by DOMA. As a result, Windsor paid $363,053 in estate taxes and sought a refund, which the Internal Revenue Service denied. Windsor filed suit, contending that DOMA violated the principles of equal protection set forth in the Fifth Amendment to the U.S. Constitution.
The Supreme Court’s decision
By a slim 5-4 majority, the Supreme Court struck down DOMA as unconstitutional. Writing on behalf of Justices Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan and Sonia Sotomayor, Justice Anthony Kennedy explained the basis for striking down the law. “DOMA seeks to injure the very class New York seeks to protect. By doing so it violates basic due process and equal protection principles applicable to the Federal Government.” He went on to state that “by creating two contradictory marriage regimes within the same state, DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the State has found it proper to acknowledge and protect.”
The court acknowledged the extensive and daunting implications of DOMA on married same-sex couples, including preventing them from obtaining government health care benefits, benefiting from provisions of the Bankruptcy Code, and filing joint federal tax returns. The court also emphasized the social stigma the law places on couples and their families.
DOMA undermines both the public and private significance of state-sanctioned same-sex marriages; for it tells those couples, and all the world, that their otherwise valid marriages are unworthy of federal recognition. This places same-sex couples in an unstable position of being in a second-tier marriage. The differentiation demeans the couple, whose moral and sexual choices the Constitution protects, and whose relationship the State has sought to dignify. And it humiliates tens of thousands of children now being raised by same-sex couples. The law in question makes it even more difficult for the children to understand the integrity and closeness of their own family and its concord with other families in their community and in their daily lives.
The aftermath of the Windsor ruling
The Windsor decision did not overturn or prohibit all laws excluding same-sex marriages and is clearly limited to federal law. The scope of its reach, however, is not insignificant. In fact, its holding has far-reaching implications for employers across the country who are governed by a number of federal employment and benefit laws.
The Family and Medical Leave Act of 1993 requires an employer to grant unpaid leave to workers who need to care for the birth of a newborn child, the adoption or foster placement of a child, or to deal with their own serious medical condition or the serious health condition of an immediate family member. The law also allows for leave for exigent circumstances associated with military deployment or to care for a service member injured in the line of duty for family members of U.S. service members. For purposes of FMLA, immediate family members are parents, children and spouses. Until Windsor, FMLA defined “spouse” as “a husband or wife as defined or recognized under State law for purposes of marriage in the State where the employee resides, including common law marriage in States where it is recognized.” Although this definition would seem to include same-sex spouses in states that recognize same-sex marriage, the United States Department of Labor, which enforces FMLA, had previously held to the contrary. In a 1998 Opinion Letter, the DOL announced that DOMA, which was enacted subsequent to FMLA, established a federal definition of marriage. Because FMLA is a federal statute, the DOL opined that “only the Federal definition of marriage and spouse as established under DOMA may be recognized for FMLA leave purposes.” With this opinion, the DOL affirmed that although state or local governments could provide greater family or medical leave rights than those provided under FMLA, the statute did not grant any such rights to same-sex married couples.
With the Windsor ruling, same-sex spouses are now considered spouses under federal law if they are considered spouses under state law. Therefore, all federal laws and regulations that include spouses encompass the broader same-sex definition in those states where same-sex marriage is legal. Now that section 3 of DOMA has been overturned, employers covered by FMLA must grant to qualifying employees time off to care for their seriously ill or injured same-sex spouses. In fact, the DOL issued guidance in August 2013 and updated their fact sheet to specifically include same-sex spouses in the definition of “spouse.” The definition interprets “spouse” based upon the state law in which the employee resides. This residency requirement stems from the DOL’s FMLA regulations (issued before Windsor), which provide that marriage for FMLA purposes is determined by the state of residence. Thus, at this time, unless the DOL issues further guidance on this issue, FMLA rights have to be provided only to those same-sex married couples residing in states where their marriages are recognized.
Beyond FMLA, President Obama also directed the attorney general to work with other members of the cabinet to review all relevant federal statutes to ensure the Supreme Court’s decision, including its implications for federal benefits and obligations, is implemented swiftly. Following consultation with the Department of Justice, the Department of the Treasury and other federal executive agencies, the DOL issued a technical release in September 2013 to provide guidance to employee benefit plans, plan sponsors, plan fiduciaries, and plan participants and beneficiaries on the meaning of “spouse” and “marriage” as these terms appear in the provisions of the Employee Retirement Income Security Act of 1974, and the Internal Revenue Code that the department interprets. In short, the DOL has taken the position that – at least with respect to employee benefit plans – the terms “spouse” and “marriage” in Title I of ERISA and its implementing regulations “should be read to include same-sex couples legally married in any state or foreign jurisdiction that recognizes such marriages, regardless of where they currently live.”
The Internal Revenue Service also issued guidance on the matter in August 2013 confirming its position that a same-sex couple is considered married (for federal tax purposes) so long as the couple was married in any state (or U.S. territory or foreign country) that recognizes same-sex marriage. Under the Internal Revenue Code, an employee’s gross income does not include employer-provided insurance coverage, including coverage for a spouse. Accordingly, if an employer offers its employees the benefit of putting their spouses on their health plan, those spousal benefits are not taxed. Before Windsor, this meant that spousal benefits for employees in opposite-sex marriages were not taxed, while spousal benefits for employees in same-sex marriages were taxed. Employers were required to impute the value of an employee’s same-sex spouse’s coverage into the employee’s income.
Now that section 3 of DOMA has been overturned, the IRS has reverted to its pre-DOMA interpretation of the IRC to determine how to interpret the term “spouse”; meaning that the IRS will defer to each state’s law regarding the definition of the term “spouse.” Thus, if an employee’s same-sex partner is considered a spouse under state law, the partner’s benefits are not to be considered part of the employee’s gross income and the IRS will not tax that partner’s health benefits. Consequently, the employee’s net income will decrease, resulting in a decrease in the amount of payroll taxes the employer and employee will be required to pay.
As of February, 17 states (California, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, Vermont, Washington) and the District of Columbia have legalized same-sex marriage. (The Illinois law will not become effective until June 1.) Oregon recognizes same-sex marriages performed in other states. In February, a Western District of Kentucky U.S. District judge ordered Kentucky to recognize same-sex marriages consecrated elsewhere finding that Kentucky laws denying recognition violate the Equal Protection Clause of the U.S. Constitution. As the Indiana legislature considers presenting a constitutional amendment banning same-sex marriage to the voters, it must also consider the impact the Windsor ruling (and recent ruling in Kentucky) will have on the scope of such an amendment.
Given these court rulings and the federal agency guidance that have been issued, now is the time for all employers covered by FMLA, or offering retirement and health and welfare benefits, to review and update their plan documents, payroll systems, and administrative procedures to comply with the Supreme Court’s ruling. Even if a company is located in a state that does not recognize same-sex marriages, benefits may still be extended to employees who either reside in states where same-sex marriage is recognized or who were married in such a state. The application of benefits is not clear-cut and employer obligations will vary from state to state and based upon the facts and circumstances of each employer and employee. Without question, employers with operations in multiple states will have to deal with a mixture of state laws governing what constitutes a spouse and must consider both the corporation’s location and the residency of its employees in determining the applicability of the federal laws to its employees.
Unfortunately, Windsor does not address whether pre-DOMA law will apply retroactively for tax or benefit plan purposes. Some unresolved issues, for example, include questions concerning claims for income tax refunds based upon the recognition of spousal status, as well as Federal Insurance Contributions Act tax refund claims by employees and employers and the rights to spousal benefits under pension and health plans. Employers must be alert to these issues and should monitor any further guidance from the IRS and DOL that will help direct how employers should address these spousal benefits and any retroactive application of Windsor.
We have not heard the last on this issue.•
Laurie Kemp is a partner in the New Albany office of Kightlinger & Gray LLP and chairs the DTCI Employment Law Section. Ms. Kemp practices throughout Kentucky and Indiana assisting clients with myriad employment-related issues as well as handling a variety of employment litigation cases stemming from discrimination, wrongful termination, harassment and retaliation claims. The opinions expressed in this article are those of the author.