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Posted: October 30, 2013

Have marriage certificate, will travel

According to IRS and DOL

Kevin Selzer

When the United States Supreme Court stuck down a central part of the Defense of Marriage Act (DOMA) on June 26, literally thousands of federal laws were impacted. DOMA was enacted in 1996 to block federal recognition of same-sex marriages and ensure that states would not be required to recognize same-sex marriages from other jurisdictions.

The former purpose (blockage of federal recognition) met its demise at the hands of the high court in June in the Windsor decision; the latter purpose (not requiring states to recognize marriage from other jurisdictions) still stands.

The portion of DOMA found unconstitutional in Windsor defined “marriage” under federal law as being only between a man and a woman, and limited the term “spouse” under federal law to refer only to an individual of the opposite sex. At first glance, the question of who is married or a spouse under federal law post-Windsor may seem like a simple question.

However, despite the usage of the terms “spouse” and “marriage” frequently in federal law, the recognition of marriage has historically been a state law question. The obvious conflict arose: would an individual subject to a valid-same-sex marriage currently living in a state not recognizing same-sex marriage be treated as married for federal law purposes?

The Internal Revenue Service (IRS) became one of the first federal agencies to weigh in and interpret the high court’s decision.  In anxiously-awaited guidance, the IRS adopted the so-called “place of celebration” rule whereby valid same-sex marriages will be recognized for all federal tax purposes regardless of whether a same-sex couple lives in a jurisdiction that recognizes same-sex marriage.

The “place of celebration” rule is in contrast to a rule that would have only recognized marriages if the employee’s state of residence recognizes the marriage. With respect to federal tax rules, employers were required to apply the new spousal definition that includes same-sex spouses beginning Sept. 16, 2013. The Department of Labor (DOL) followed suit on Sept. 18, 2013, by adopting the same “place of celebration” rule for purposes of the Employee Retirement Income Security Act (ERISA). 

This collective IRS and DOL guidance comes as a relief to many employers trying to determine the correct administration and taxation of employee benefits because it provides a uniform federal rule. Nevertheless, there are at least two areas where inconsistent administration will persist – for now at least. 

First, under the remaining provisions of DOMA, states are still permitted to not recognize a same-sex marriage from another state. For instance, an individual living in Colorado subject to a valid same-sex marriage performed in another state would be treated as married under federal tax law but not under state law.

Where this inconsistency arises, changes in state law may be required to coordinate the filing of state income tax returns dependent upon federal status. Second, partners in a civil union, domestic partnership or other spousal-equivalent relationships may be recognized as if the relationship were a marriage under state law; however, the federal recognition of same-sex marriage at this point is limited to marriages, and specifically excludes civil unions and similar relationships.

Despite the guidance, some questions remain unanswered, and employers should heed the remaining uncertainty, as potential liability is lurking. As the title of this article indicates, a same-sex marriage certificate will travel thanks to uniform federal recognition under the “place of celebration” rule, but to what extent will that marriage certificate travel back in time?

The guidance to date provides only peripheral retroactive recognition, allowing employers and employees to seek refunds in open tax years for overpaid taxes as a result of the federal non-recognition of the same-sex spousal status. Of particular importance will be the extent to which same-sex spouses can make a claim for benefits under ERISA on a retroactive basis. 

For example, ERISA provides that a spouse of a participant under certain retirement plans (e.g., a 401(k) plan) must be the default beneficiary under the plan in the event of the participant’s death, and further that the participant cannot designate another beneficiary without the spouse’s consent. If a participant died in 2010 with a same-sex spouse but without naming a beneficiary before death, the retirement plan likely would have paid the death benefit to another default beneficiary.

Could the same-sex spouse now sue the plan for the death benefit under the plan?  The recent DOL guidance does not address this scenario. At least one court has already ruled that, based on Windsor, the same-sex spouse has a right to the benefit. Although that case involved benefits that had not yet been distributed from the retirement plan, the case certainly lays the groundwork for a retroactive claim for benefits already paid because the participant’s death in that case occurred while Section 3 of DOMA was still law. It will likely be the courts who are tasked with sorting out the retroactive ERISA rights question.

The IRS and DOL have indicated that future guidance is coming, but some employers will face touch decisions in the interim.  Employers should assess the benefits being provided that could harbor these risks, as well as identify and implement risk mitigation strategies. A place to start would be to review plan documents providing employee benefits, such as retirement, health, dental, vision, life insurance, disability, severance and other benefits.

Such documents often define spouse in a way that may be ambiguous or even wrong post-Windsor. Employers who provide health plan coverage to domestic partners need to collect information about which of those partners qualify as same-sex spouses, so that the employer is taxing benefits correctly.  Retirement plan participants should also be encouraged to update their beneficiary designations and, if applicable, obtain consent of their same-sex spouses on any non-spouse beneficiary designations.

Kevin Selzer is an attorney in the Employee Benefits practice of Holland & Hart. He counsels clients on the full range of issues that affect 401(k) plans, profit sharing plans, pension plans, government plans, health and welfare benefit plans and other employee benefit arrangements. He can be reached at (303) 295-8094 or KASelzer@hollandhart.com.

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