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On Wednesday, June 26, 2013, the United States Supreme Court
(the "Court") issued two significant decisions relating to
same-sex marriage, both of which will have far-reaching effects on the
design and tax treatment of employee benefit plans. Although the
effects of Hollingsworth
v Perry generally extend only to employees residing
in California, the implications of U.S. v Windsor
are important for benefit plan administrators across the country.
The practical impact of these decisions on the design and administration
of employee benefit plans is still being assessed and the Court left
many questions unanswered. For example, while it is now clear that
the definition of "spouse" in the Defense of Marriage Act
("DOMA") is unconstitutional, benefit plan administrators must
grapple with the absence of a uniform definition of
"spouse." A patchwork of state laws governing the
definition of "spouse" creates significant uncertainty relating
to the tax treatment of same-sex spousal benefits. As we explain
below, clear guidance in this area would be welcome.
Hollingsworth v Perry.
While this case has a complicated procedural history, and was decided on
the narrow issue of "standing," the result is essentially that
same-sex marriage in California is once again legally permitted.
The Court's decision in Hollingsworth v Perry
involved an appeal by the proponents of Proposition 8 in California to
overturn the Ninth Circuit's affirmation of the federal District Court's
decision that Proposition 8 was unconstitutional. Proposition 8 was
approved by the California voters in 2008 and amended the California
Constitution to provide that only marriage between a man and a woman is
valid in California. The Court did not address the merits of the
constitutional challenge to Proposition 8 and limited its ruling to the
issue of whether the proponents of Proposition 8 had standing under federal
law to appeal the Ninth Circuit's decision that Proposition 8 was
The Court held in a 5:4 decision that the proponents of
Proposition 8 did not have standing to appeal the Ninth Circuit's
decision. The impact of the Court's decision to employers with
employees in California is that the holdings of the District Court in Perry v.
Schwarzenegger in 2010 and the California Supreme
Court's decision in In
re Marriage Cases in 2008 (that preceded Proposition
8) are now the law of the land in California. In the Perry
case, the District Court declared Proposition 8 unconstitutional and
permanently enjoined the state of California from enforcing it. In
re Marriage Cases, the California Supreme Court
ruled that limiting the official designation of marriage in California to
opposite-sex couples violated the equal protection clause of the California
Constitution Thus, same-sex marriage in California is legal once
U.S. v Windsor. In U.S. v Windsor,
the Court struck down section 3 of DOMA as unconstitutional because it
violates basic due process and equal protection principles under the U.S.
Constitution. Section 3 of DOMA denies federal recognition to
same-sex spouses. It provides as follows:
In determining the meaning of any Act of Congress, or of any
ruling, regulation or interpretation of various administrative bureaus and
agencies of the United States, the word 'marriage' means only a legal union
between one man and one woman as husband and wife, and the word 'spouse'
refers only to a person of the opposite sex who is a husband or a wife.
The Court found that section 3 of DOMA has a far-reaching
impact as it enacts a directive applicable to over 1,000 federal
statutes. The Court found that the definition and regulation of
marriage has historically been the realm of the states and that section 3
of DOMA deviates markedly from that tradition because of its reach and
intent and it has the effect of disadvantaging a class of citizens that
some states have tried to protect. The Court's decision is limited to
section 3 of DOMA and did not strike down any other section of DOMA, such
as section 2 which allows states to refuse to recognize same-sex marriages
performed under the laws of another state.
Impact of the Court's Decisions on Employee
Section 3 of DOMA is now unconstitutional and the many
aspects of federally-governed employee benefit plans involving
"spouses" will soon undergo significant changes, but the Windsor
decision leaves many questions unanswered.
Retroactive Application of Windsor Decision and Interaction
with State Law. The Court in the Windsor
decision left open the question whether section 3 of DOMA should be treated
as if it was never enacted in 1996, thus potentially making the Court's
decision retroactive to 1996. Prior to the enactment of section 3 of
DOMA, the Internal Revenue Service relied on state law to determine an
individual's status as a spouse for tax purposes. Although the Court did
not explicitly address this retroactivity issue, the decision holds
that "[T]his opinion and its holding are confined to those lawful marriages."
"Lawful marriage" is not defined or further described in the
decision, and leaves open to speculation whether "lawful
marriages" for federal law purposes (such as taxation) include all
same-sex marriages lawfully performed in a state that recognizes same-sex
marriage, regardless of where the couple currently resides. For
example, is a couple who married in Massachusetts (a state that recognizes
same-sex marriage) but currently lives in Texas (a state that does not
recognize same-sex marriage) in a "lawful marriage" and therefore
entitled to equal protection under federal law? Is that couple
therefore entitled to the same tax treatment for employee benefit plan
purposes as a couple who married in New York (a state that recognizes
same-sex marriage) and who still lives in New York?
Although the Court struck down section 3 of DOMA as
unconstitutional, it reiterated that the definition and regulation of
marriage has historically been the realm of the states. Currently, 12
states and the District of Columbia explicitly recognize same-sex
marriage. In addition, some states that may not permit same-sex
marriage do recognize marriages in other states. Until the Internal
Revenue Service provides guidance, benefit plan administrators may be required
to navigate a patchwork quilt of state laws to determine the appropriate
tax treatment of same-sex spouses under their employee benefit plans.
In addition to dealing with changes to the tax treatment of
same-sex spouses under employee benefit plans, benefit plan administrators
also will need to deal with other design changes to their employee benefit
plans, such as eligibility of same-sex spouses to certain "surviving
spouse" benefits under retirement plans and to COBRA benefits under group
and Benefits Group will continue to monitor regulatory guidance, any
new court challenges or legislative changes that affect an employer's
obligations to its employees' same-sex spouses.