The U.S. Supreme Court issued two highly anticipated rulings related to same-sex marriage on June 26 that essentially placed matters of marriage back with the states. This has a direct impact on retirement plans.
First, the Court held that Section 3 of the federal Defense of Marriage Act is unconstitutional based on the equal protection clause (United States v. Windsor). Second, the justices ruled that the plaintiffs seeking to defend a ban on same-sex marriage in California lack standing (Hollingsworth v. Perry). The Windsor decision affects the federal definitions of “marriage” and “spouse” established when Congress enacted DOMA in 1996, which forced certain state-recognized same-sex couples to be treated as unmarried for purposes of federal law and certain employee benefits, including retirement plans.
Because the Court struck down DOMA’s definition of “marriage,” many retirement plans will need to amend their definition of spouse, and implement procedures that recognize same-sex spouses under their plans. This column takes a look at some of the considerations that plan sponsors will need to review and lists a few questions raised by the ruling.
Background
The state of New York recognizes same-sex marriages of its residents; therefore, it recognized the 2007 Canadian union of Edith Windsor and Thea Spyer. However, when Spyer died in 2009 and left her estate to her same-gender spouse, Windsor was unable to claim the federal estate-tax exemption as a surviving spouse. Because Section 3 of DOMA excluded same-sex spouses, an estate tax in excess of $360,000 was imposed.
Windsor sought a refund of the estate taxes paid, and IRS denied the claim. She next filed a refund suit in the 2nd Circuit’s U.S. District Court for the Southern District of New York on the grounds that DOMA violated the principles of equal protection incorporated in the Fifth Amendment of the U.S. Constitution. The District Court and the Court of Appeals in that circuit both found DOMA to be unconstitutional and ordered the U.S. Treasury to refund the taxes with interest. The Supreme Court affirmed the ruling.
It is important to note that DOMA does not prohibit states from establishing laws that allow and recognize same-gender unions. While Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington state and the District of Columbia recognize same-sex marriages, Section 2 of DOMA allows the 37 states with laws that restrict same-sex marriage to elect to recognize or not recognize same-sex marriages performed in another state. This state-specific option will create administrative challenges for retirement plans when participants live in one state and work in another, marry in one and work in another where same-sex marriage is not allowed or an employer plan has participants in multiple states with differing recognition of same-sex marriage.
Retirement Plans
For states where same-sex marriage is recognized, it follows that, for federal purposes, same-sex spouses are entitled to the same benefits as opposite-sex spouses. Additional guidance from IRS is expected regarding the effective date and tax treatment for such benefits.
However, there are many questions as to how same-sex spouses shall be treated for qualified retirement plan purposes in states that don’t recognize these unions, as well as when state residency changes after marriage or following retirement.
To read the complete column on Thompson’s HR Compliance Expert, click here.
Arris Reddick Murphy is an attorney with experience in the employee benefits and executive compensation practice area, and she is senior counsel with FedEx Corp.’s Tax & Employee Benefits Law group. Before joining FedEx, she held the position of associate with the law firm of Potter Anderson & Corroon, LLP, and worked in-house with The Vanguard Group and the City of Philadelphia as counsel to its Board of Pensions and Retirement.The views expressed in this column are strictly Ms. Murphy’s, and are not those of FedEx Corp.,any of its operating companies or affiliates. She is contributing editor of The 401(k) Handbook.