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The Supreme Court decided two landmark cases in the last three years overturning the Defense of Marriage Act (DOMA), but employers are still managing the outcomes of having to change employee benefits to stay in compliance.
Retroactive application of the decisions, in particular, creates challenges. But benefits administrators can take steps to limit the impact, according to Todd Solomon, an attorney with McDermott Will & Emery in Chicago, who led a concurrent session June 21 at the Society for Human Resource Management 2016 Annual Conference & Exposition.
The Supreme Court struck down Section 3 of DOMA, which defined marriage as between a man and a woman, in 2013 (U.S. v. Windsor). But it didn’t touch Section 2 of DOMA, which allowed states to refuse to recognize other states’ same-sex marriages. Then in 2015, the Supreme Court ruled that the 14th Amendment required each state to recognize same-sex marriages performed in other states and to license marriages between two people of the same sex (Obergefell v. Hodges).
For the most part, these decisions simplified benefits administration going forward, particularly tax issues under group health insurance plans. For example, employees no longer have to pay federal income tax for income imputed on the fair market value of employer-provided benefits coverage for same-sex spouses. Employees also now can pay for same-sex spousal coverage using pretax contributions under cafeteria plans.
But retroactive application of the decisions complicates benefits administration.
Take retirement plans. A spouse must consent if an employee names a beneficiary other than a spouse. So if a brother was named a beneficiary five years ago and the employee is married to a same-sex spouse, that spouse’s consent is now needed for the brother’s designation as beneficiary to still be valid.
Even if benefits previously were paid to someone else, a same-sex spouse may claim retroactive benefits, as a spouse is the automatic beneficiary if there is no named beneficiary. Plans can defend themselves from such claims by defining “spouse” in their plans prior to June 26, 2013, when Windsor was decided, as a man married to a woman or a woman married to a man. That will “protect against retroactive application,” Solomon said. “You don’t want to be in a double payment situation.”
Survivor annuities may be affected by the Supreme Court cases as well. If a “spouse” is due benefits, there’s a “real risk of retroactive claims” by individuals who were same-sex spouses before Windsor, he noted. At least one court has allowed a same-sex marriage claim for survivor benefits to proceed even though the marriage and death occurred prior to Windsor.
Prior to the Supreme Court decisions, employees had to pay federal income and employment tax for income imputed on the fair market value of employer-provided benefits coverage for a same-sex spouse regardless of whether the couple lived in a state where same-sex marriage was legal.
Retroactive tax implications of the decisions include the following:
• Employers may request a refund or adjustment of payroll taxes paid on imputed income for same-sex spousal benefit coverage for open tax years—usually three years—since employers paid tax on the income, too.
• Employees may elect to file amended tax returns to claim refunds on income and employment taxes paid on same-sex spousal benefits in prior open tax years.
• Employers will likely receive requests from employees for corrected W-2s or information about the amount imputed on their income in prior years.
Employers don’t have to provide corrected W-2s if employees haven’t requested an adjustment of payroll taxes, but they generally do as a courtesy to employees. Most employers aren’t seeking such adjustments, however, because the process for securing adjustments is complicated, Solomon said.
Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.
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