Because employee benefit plans are regulated by federal law, many questions have arisen regarding the extent to which Windsor will affect the administration of retirement plans, health plans and other employee benefit plans. The Internal Revenue Service and the Department of Labor have recently provided guidance on how they will apply the Windsor decision that answers many of these questions.
Both the IRS and the DOL have indicated they will apply a state-of-celebration rule under which a marriage valid in the state in which it is celebrated will be valid for employee benefits purposes in all states. For example, a same-sex couple that gets married in Washington or California (where same-sex marriage is recognized), will be treated by the IRS and DOL as married, even if they reside in Idaho.
Domestic partnerships and civil unions will not be recognized by the IRS or DOL as marriage.
As a result, even though Idaho does not recognize same-sex marriage, Idaho employers will be required to recognize same-sex spouses married in other states for many employee benefits purposes, including the following:
- Spousal consent requirements for distributions and beneficiary designations. For example, a 401(k) plan participant must now obtain the consent of his or her same-sex spouse to designate a beneficiary other than the spouse.
- Special spousal distribution rights and privileges. For example, upon the death of a participant, the participant’s same-sex spouse can now roll over distributions into the spouse’s IRA or employer plan.
- Spousal rights to retirement plan benefits upon divorce. For example, retirement plans must now honor valid court orders granting a participant’s retirement benefits to his or her former same-sex spouse.
Under current guidance, Idaho employers are not required to allow same-sex spouses to participate in their employee benefit plans. For example, an Idaho employer will be able to continue to limit medical coverage to opposite-sex spouses of employees in Idaho. Please note, however, that some states require employers to offer coverage to same-sex spouses if they offer coverage to opposite-sex spouses. Idaho employers with employees in such states generally must comply with the law in the state where the employee resides.
However, if an Idaho employer decides to offer benefits to same-sex spouses married in a state that recognizes same-sex marriage, the following apply:
- Medical, dental and vision coverage for same-sex spouses is now tax-free. (Previously, employees were imputed taxable income of the value of coverage provided to same-sex spouses. The imputed income was subject to income taxation and other withholding taxes.)
- Health expenses incurred by same-sex spouses are now reimbursable by flexible spending accounts, health reimbursement accounts and health savings accounts.
- COBRA coverage and HIPAA special enrollment rights are now available to same-sex spouses.
The IRS guidance became effective Sept. 16. As a result, employers should act fast to revise administrative procedures to comply with the new requirements. In order to ensure compliance, employers should do the following:
- Revise retirement plan administrative procedures to ensure that same-sex spouses are treated as spouses for spousal consent and spousal distribution purposes.
- Review plan documents to confirm that the terms “spouse” and “marriage” are properly defined. The IRS has indicated that it will provide further guidance on the timing requirements for technical plan amendments to comply with new guidance. However, if a plan amendment is needed to clarify that same-sex spouses may or may not participate in a plan, an amendment should be adopted as soon as possible.
- If an employer provides health coverage to same-sex spouses, it should revise its tax withholding procedures as soon as possible so that the value of same-sex spouse coverage is no longer imputed in income.
- If an employer provides health coverage to same-sex spouses, COBRA and special enrollment procedures should be revised to recognize same-sex spouses.
Bret Clark, an attorney at Hawley Troxell, provides legal services to the firm’s employee benefits and executive compensation clients. He can be reached at email@example.com.