Legal Updates

Supreme Court’s DOMA Ruling Raises Issues For Employers

In late June, the United States Supreme Court struck down Section 3 of the Defense of Marriage Act (“DOMA”), which defined marriage, for purposes of federal law, as a union between a man and a woman and prohibited the federal government from recognizing marriages between same-sex couples.  The Court found this provision of DOMA unconstitutional, on the basis that it failed to respect states’ rights to give equal recognition to same-sex and opposite-sex marriages.  Significantly, the Court did not strike down Section 2 of DOMA, under which states are not required to recognize same-sex marriages performed in other states.

As a result of the Court’s ruling, same-sex married couples working in states that recognize their marriages are now entitled to the same benefits, rights and protections under federal law as opposite-sex couples.  The Court’s decision, however, leaves open some important and potentially complex issues that are likely to take time to be resolved.

Background And Case History

The Supreme Court’s decision, in U.S. v. Windsor, involved a same-sex couple, Edith Windsor and Thea Spyer, who were married in Ontario, Canada, but resided in New York, which recognizes same-sex marriages.  When Spyer died, she left her entire estate to Windsor, who sought to claim the federal estate tax exemption for surviving spouses.  Windsor, however, was barred from doing so by Section 3 of DOMA, despite the fact that her marriage to Spyer was recognized by the state of New York.  As a result, Windsor was forced to pay $363,053 in federal estate taxes.

After the IRS denied her request for a refund of the estate taxes, Windsor brought suit in a New York federal district court, arguing that DOMA violated her equal-protection rights under the Constitution, since Windsor would have been entitled to the federal estate tax exemption if she had been married to a man.  The district court found in Windsor’s favor, and the Court of Appeals for the Second Circuit affirmed the district court’s ruling.  Subsequently, the Supreme Court agreed to hear the case.

Supreme Court’s Decision

In a decision by Justice Kennedy, the Supreme Court majority struck down Section 3 of DOMA.  Noting that “[b]y history and tradition the definition and regulation of marriage has been treated as being within the authority and realm of the separate states,” Justice Kennedy determined that, by failing to respect New York’s decision to afford equal recognition to same-sex and traditional marriages, this provision of DOMA had an impermissible “purpose and effect to disparage and injure those whom the State, by its marriage laws, sought to protect in personhood and dignity.”  In addition, Justice Kennedy argued, Section 3 of DOMA inappropriately served to “create second-class marriages for the purpose of federal law” by “writing inequality into the entire United States Code.”

Accordingly, the Court concluded that Section 3 of DOMA was unconstitutional.  As a result, same-sex married couples working in states that recognize their marriages no longer need to be treated differently, for purposes of federal law, from opposite-sex couples.

Notably, Justice Kennedy’s opinion made clear that the Court’s decision was limited to same-sex marriages in states that recognize such marriages.   Currently, California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, and Washington D.C. all recognize same-sex marriages.  By contrast, the Windsor decision does not apply to same-sex couples in states that do not recognize same-sex marriage, or to unmarried couples in registered domestic partnerships.  Because  Section 2 of DOMA was not struck down by the Court in Windsor, states are free to deny recognition of same-sex marriages performed in other states.

Implications Of Windsor Decision

The implications of the Windsor decision are far-reaching.  Although the case involved the federal estate tax specifically, the Court made clear that its holding extended to more than 1,000 federal statutes and regulations that currently restrict benefits to opposite-sex married couples.

In particular, because many employee benefit plans and policies are governed by federal law, the Windsor decision will have a significant impact on employers in states that recognize same-sex marriage.  Employers will have to take care to ensure that same-sex married couples residing in such states are treated the same as opposite-sex married couples with regard to federal benefits.

Thus, for instance, same-sex spouses of employees in states recognizing their marriages will now be eligible for health insurance through their spouses’ employers, without having to pay federal income taxes on the value of the benefits.  Similarly, same-sex spouses will be considered “spouses” for purposes of COBRA health insurance continuation, as well as the Family and Medical Leave Act (“FMLA”), which entitles employees to take leave to care for a spouse with a serious health condition.

However, the Windsor decision also leaves some important questions unanswered.  In this regard, many federal laws governing spousal benefits do not specify which law determines whether a person is “married,” instead deferring to state law on this issue.  Thus, it may be difficult for an employer to determine, for instance, whether a same-sex couple who was married in a state that recognizes such marriages, but who now lives or works in a state that does not recognize same-sex marriage, should be treated as married for purposes of federally-governed benefits.  Presumably, further guidance will emerge on these issues, in the form of executive orders, agency regulations and/or court decisions.

Also, because the Court held that Section 3 of DOMA was unconstitutional from its inception in 1996, employers may face retroactive benefits claims by employees in same-sex marriages.  Along similar lines, some employers may consider seeking refunds of FICA taxes that they have paid on imputed income resulting from health benefits provided to same-sex spouses.  As the Court’s opinion did not directly address the issue of retroactivity, it is unclear how such claims will fare in the courts.

Recommendations For Employers

It is likely to be some time before all of the issues raised by the Windsor ruling are resolved.  For now, however, employers should take the following initial steps to address this important change in the law:

• Employers in Massachusetts (and other states that recognize same-sex marriage) who have been providing health benefits to the same-sex spouse of an employee and treating the value of that coverage as taxable income to the employee should immediately stop imputing such income to the employee.  Same-sex spouses are now entitled to the same favorable tax treatment as opposite-sex spouses.  Unfortunately, it is unclear at this point how employers should handle the imputed income already recognized during the first half of 2013.
• Employers in states that do not recognize same-sex marriages will have to continue to treat as taxable income the value of health insurance provided to the same-sex spouses of employees.  Multi-state employers will have to ensure that their payroll systems are designed to handle this different tax treatment correctly depending on the state in which an employee works.
• Benefit plans and handbook provisions regarding the tax treatment of health insurance premiums must also be revised.
• All employers should review and revise as necessary all federally-governed benefits plans, policies and consent forms to include a same-sex spouse within the definition of a covered spouse.  Because there are so many questions remaining regarding the impact of the Windsor decision on employer benefits, employers should consult counsel to ensure that these plans are revised in accordance with the decision and the guidance that will be issued in the future.
• Finally, employers should monitor the news for agency decisions, regulations and other guidance as to the issues left unresolved by the Windsor ruling.

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Please feel free to contact us if you have any questions about the impact of the DOMA ruling on your workplace.