Agenda: Retirement Planning Benefits After DOMA

Supreme Court decision on gay marriage alters the retirement benefits landscape.

By Joanne Sammer Oct 1, 2013

October Cover

When DigitasLBi, an advertising agency, developed state-specific resource booklets earlier this year for its lesbian, gay, bisexual and transgender employees, the goal was to help them understand the various benefits the company offers during different life stages and events (such as marriage, birth or adoption of a child, purchase of a home or retirement).

Leaders of the Boston-based company, which has 2,500 employees in the U.S., felt it was important to provide the booklets because many gay couples have limited experience dealing with these benefits and the associated laws. "I am gay myself, and we have less life experience with these kinds of things than straight couples," says Paul Gorrell, the company’s chief talent officer. "We have to learn how to maneuver through these laws and manage life events, because it is kind of new to our experience."

Many same-sex couples and employers have been looking at these topics much more closely since the U.S. Supreme Court’s decision in United States v. Windsor struck down Section 3 of the Defense of Marriage Act (DOMA). Section 3 had limited the definition of marriage as being only between one man and one woman and had limited the definition of spouse as being only a person of the opposite sex. The law effectively prevented same-sex spouses from qualifying for a range of federal tax and other benefits accorded to other married people.

The Windsor decision opened the door to changes that give employees in same-sex marriages the same status under federal law as employees in opposite-sex marriages, and employers are still learning what that means for the retirement plans they sponsor.

Changes for All Employers

The U.S. Department of the Treasury, which is coordinating regulatory changes related to the Windsor decision, addressed one key compliance question through an Internal Revenue Service ruling issued at the end of August: All legal same-sex marriages will be recognized for federal tax purposes, regardless of where the parties live. In other words, all employers in all states have to provide employees and their same-sex spouses access to the same benefits allowed by federal law that are available to all other married employees and their spouses.

For example, an employee and his or her same-sex spouse living in Illinois or Texas—states that do not allow same-sex marriage—would be eligible for a hardship withdrawal from the employee’s 401(k) plan to pay for the spouse’s medical expenses, as long as the couple was legally married in a state that allows same-sex marriage.

From an administrative and employee relations standpoint, the IRS ruling should be welcome news to employers. The alternative approach—limiting same-sex marriage benefits only to employees who live in states that allow same-sex marriage—would have created a level of administrative hassle that most employers would rather do without.

"Although we agree with the Windsor decision, the most frustrating thing would be if the decision and how it impacts benefits increases administrative complexity," says Chad Reese, director of HR operations, who works in the Portland, Ore., office of Ecova Inc., an energy and sustainability management company.

An approach based on where an employee lives also would have put employers in the uncomfortable position of providing unequal benefits for different groups of otherwise equal employees. Gorrell notes concern that providing different benefits for employees in different states will have a negative impact on an organization’s culture. "It is not good for a company’s culture if your employee gets better benefits just because of where they happen to live," he says.

Before the August IRS ruling, Ecova had been taking a wait-and-see approach, on the advice of its benefits advisors. The company can afford to do so because none of the 700-odd employees in its Spokane, Wash., headquarters has been affected by the Windsor decision. Washington is one of the 13 states (plus the District of Columbia) that allow same-sex marriage. "Some of our Oregon employees have same-sex partners, but Oregon does not yet allow same-sex marriage," Reese says.

Other HR executives are likely to welcome the IRS ruling simply because they do not want to be the judge of what a legal marriage is. "We are not going to become the marriage police," says Todd Presley, SPHR, executive director of human resources for The McEvoy Group LLC, a publishing company in San Francisco. "Rather than us becoming the arbiter of what law is, we will say, ‘If you can provide us with a legal marriage license, we are going to recognize it.’ "

The OPM Model

Just days after the U.S. Supreme Court’s decision in United States v. Windsor, which struck down Section 3 of the Defense of Marriage Act, the federal Office of Personnel Management (OPM) issued a memo clearly stating that the federal government would be using “state of celebration” as the criterion for recognizing federal employees’ same-sex marriages for benefit purposes: “Benefits coverage is now available to a legally married same-sex spouse of a Federal employee or annuitant, regardless of the employee’s or annuitant’s state of residency. Legal same-sex marriages entered into following [the Supreme Court] decision will be treated in the same manner as opposite-sex marriages, regardless of an employee’s or annuitant’s state of residency.”

The OPM also provides a model for how federal employers can handle the specific changes the Windsor decision will require. The OPM is allowing retirees and active employees until June 26, 2015—two years from the date of the Supreme Court’s decision—to alert the agency of their marriage and make any necessary changes to their retirement benefits. This is a major issue for current retirees who were married to same-sex partners at retirement but were unable to choose a joint and survivor annuity because those marriages were not recognized by federal authorities.

To address this issue, the OPM is allowing those retirees to change their annuity selection to provide benefits for a surviving spouse. This decision will have some financial implications for these retirees because a joint and survivor annuity provides a lower monthly benefit than an individual annuity, but payments do not cease when the retiree dies. At the time of this notice, the OPM was promising to provide guidance to help those retirees make that decision.

Another Question Remains

One key question still needs to be answered: When do these benefits take hold? Retirement benefits plan provisions affecting same-sex spouses could be allowed on a prospective basis starting from the date of the Windsor decision, which was June 26, 2013, or retroactively from some other date. (Guidance on this issue was not yet released as of press time.)

"There is precedent for making a Supreme Court-made change in the law prospective only with respect to benefit claims," says Robert Newman, a partner at law firm Covington & Burling LLP in Washington, D.C. "That is something the government could weigh in on or that could be resolved through litigation."

If benefits are retroactive, "the key issue will be how far back ‘retroactive’ goes," says Lane Transou, SPHR, principal at Lane Transou Consulting in Houston. Transou says a clear and firm date needs to be set.

"If the benefits are retroactive, that could open a whole can of worms in terms of potential claims," says Robyn Credico, defined contribution practice leader, North America, at Towers Watson in Washington, D.C. "Spouses could make claims on all sorts of issues—from hardship withdrawals and loans taken without permission to naming beneficiaries other than the spouse—that could be costly and confusing to resolve."

Perhaps the best indication of which direction the federal government might go on this retroactive-or-prospective benefits question comes from the approach adopted by the Office of Personnel Management (OPM), which handles HR issues for the federal government. If the federal regulations follow OPM policies now in place, benefits changes will occur on a prospective basis.

For employers, the OPM’s approach would likely be the best possible outcome from an administrative standpoint. For one thing, "it will be remarkably difficult to make any of these changes retroactive because so many would be nearly impossible to undo or redo," says Gary Kushner, SPHR, president of Kushner & Co., an HR and benefits consultancy in Portage, Mich. "My guess is that these changes will be prospective from the date of the Windsor decision."

Yet, with more to be determined, employers need to be careful what they tell employees. Presley notes that his company’s initial benefits-related communication about the Windsor decision emphasized the need for employees to consult their own tax advisors to determine how the decision affected their individual situations.

Key Plan Changes

Employers will need to change many aspects of their retirement plans in the wake of the Windsor decision. In general, all U.S. employers must make available to same-sex spouses any retirement benefit that is available to opposite-sex spouses. However, employers should consult legal counsel and their benefits advisors to address specific questions and situations.

Beneficiaries. In any retirement plan, a participant’s spouse becomes the default beneficiary for any retirement benefits earned should that participant die before retiring. If a participant wants to name someone other than his or her spouse as beneficiary, the participant must obtain spousal consent before doing so. Therefore, employers will need to contact all plan participants who are in a legal same-sex marriage to address any spousal consent issues and necessary beneficiary changes.

Other rules must also extend to same-sex spouses, including required minimum plan distributions. For example, a widowed same-sex spouse can delay taking his or her spouse’s retirement benefits until the spouse would have reached age 70½, rather than beginning to take the distribution within one year and completing it within five years as a nonspouse would, says Newman.

In a traditional defined benefit pension plan, the beneficiary issue is more complex. Increasingly, these plans offer vested employees a lump sum or annuitized payments during retirement. If annuitized payments are elected, pension distributions must be made in the form of a qualified joint and survivor annuity unless the spouse waives his or her rights, in which case the payments would be made to the retiree through a single life annuity. Because same-sex marriage was not recognized by the federal government until Windsor, pension plans could not offer a joint and survivor annuity to acouple in a same-sex marriage.

To comply with the IRS ruling, plan sponsors could allow current retirees in a same-sex marriage who are already receiving pension payouts to change their payout option to a joint and survivor annuity. The OPM is allowing federal employees to choose this option. However, this approach could be extremely complicated from an administrative standpoint, as well as a plan funding standpoint. "If [retirees] can change their benefit distribution status, that could impact the defined benefit plan’s funding and financial estimates," says Transou.

Hardship withdrawals. Hardship withdrawal requirements will also need to be changed for plan participants in a same-sex marriage. First, a hardship withdrawal or plan loan generally will require the consent of the same-sex spouse. Second, the circumstances under which a participant can take a hardship withdrawal—such as paying for a spouse’s medical expenses, funeral or education—will also have to extend to same-sex spouses.

Domestic partnerships. Ironically, the Windsor decision could make domestic partner benefits obsolete. "A lot of employers offer domestic partner benefit options," says Credico. "Now, those employers have to decide whether to continue to offer those benefits."

More to Come

Many legal questions will remain even after the federal guidance comes out. Same-sex spouses and couples have already filed a number of lawsuits to claim retroactive retirement and survivor benefits since the Windsor decision. Moreover, the Supreme Court didn’t strike down DOMA in its entirety. "DOMA is still standing, but I would argue that it is on one very wobbly leg," Kushner notes. "I would not be surprised if all of DOMA is eventually ruled unconstitutional by the Supreme Court."

As the situation evolves, employers can probably expect the employees most affected to learn more details about the benefits to which they are now entitled, whether that means reading through booklets like the ones developed by DigitasLBi or consulting independent advisors.

"Employees who are in a same-sex relationship are very educated about what is happening," Reese says. "Many have educated themselves and are very aware of what is going on."

Joanne Sammer is a New Jersey-based freelance writer.


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