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Updating Benefits Forms to Include Same-Sex Spouses
by Mickie Murphy
The Supreme Court of the United States dissolved part of the Defense of Marriage Act in United States vs. Windsor, effective September 16, 2013. This means that any marriage performed legally under state laws will be recognized by the federal government for tax purposes, IRS regulations, and U.S. Department of Labor regulations governing employee benefit plans. What does same-sex marriage mean for employers who sponsor benefit plans? On a basic level, it will require clear communication and updating plan documents.
Communicating with employees
While there is no mandate for employers to provide an update on the law change, it is prudent to communicate to employees that they should update their employment records to reflect their newly recognized married status in order to receive proper treatment concerning withholding taxes and benefits. Although state law regarding taxes and benefits may differ, Federal law recognizes only those who have been legally married and does not extend to registered domestic partnerships or civil unions.
The IRS has provided special employment tax procedures for correcting 2013 withholding taxes for employees who are now determined to be married for tax filing purposes. Employee elections should be modified for payroll as soon as possible and any necessary corrections must be made to withholding taxes. Individuals may also amend income tax returns for open tax years 2010 – 2012.
Benefits previously available to opposite-sex spouses must be extended to newly recognized spouses. Health and welfare plans that offer after-tax domestic partner benefits must make corrections immediately for the 2013 plan year to provide these as pre-tax benefits, if spouses are otherwise eligible.
Employers are encouraged to review health and welfare plans with insurance carriers and legal counsel, and discuss their obligation to immediately enroll same-sex spouses (and potentially their dependents) who are not currently covered. While some insurance carriers are recommending waiting until the next open enrollment period, you may wish to evaluate your liability for claims resulting in a delay in coverage.
Review and amend plan documents
Organizations should review plan documents and forms for both health and welfare benefits and retirement plans to determine if their current definition of marriage needs to be amended. Although many plans do not define marriage in a way that will need to be changed, references to opposite-sex marriages risk disqualifying a plan.
For all employees with a newly recognized spouse, one of the most important elements to immediately address is beneficiary forms. Qualified retirement plans require that a participant’s spouse consent to any beneficiary named other than the spouse. For employees with newly recognized marriages, beneficiary forms that have previously named someone other than their spouse will require spousal consent. This would be a good time to ask all employees to update their beneficiary forms for any changes, including newly recognized marriages, divorce or any other status change.
Other benefit elections for which a spouse is designated or spousal consent is required must also be updated, including elections for non-qualified deferred compensation plans, COBRA, and the Health Insurance Portability and Accountability Act.
It is imperative that an employee’s newly recognized marriage status also be updated with all third party administrators so that benefits are administered properly. This applies not only to death benefits, but for qualified plan payments with spousal consent requirements, such as hardship withdrawals, loans, and distributions that offer qualified joint and survivor annuity options. Eligibility for treatment as a spouse for a rollover IRA is affected as well. Required minimum distribution calculations before and after a participant’s death also take marital status into consideration.
Qualified Domestic Relation Orders (QDRO) may now be filed against retirement plan benefits for same-sex marriages, however, participants may find an unexpected quirk here. Although federal law will recognize same-sex marriages based on the place of celebration, and a retirement plan will recognize a QDRO issued by a state court, states are not required to recognize same-sex marriage laws of other states. Divorce will be granted by state law in the place of domicile, and divorce settlements may be difficult if the state does not recognize same-sex marriage.
Many benefit plans require some type of non-discrimination testing to ensure that benefits are not skewed to “highly compensated employees” (as defined by law). In small or medium-sized organizations, often a spouse will also be employed by the company. The definition of a highly compensated employee generally includes the employee-spouse of a business owner, but in the past, a same-sex spouse would not have qualified. Now, business owners in newly recognized marriages may find they fail compliance tests that they had passed for years.
Employers may claim a refund for Social Security and Medicare taxes paid on retroactive benefits for open tax years 2010 – 2012. A sole proprietor may also claim a refund for Social Security, Medicare, and Federal Unemployment Tax Act taxes on wages paid to a same-gender spouse who was an employee of the business for the open tax years. Similarly, individuals may amend tax returns, but no one is required to do this, or claim refunds.
Regulating agencies are aware of the difficult issues in permitting retroactive claims in cases where payment of plan benefits to a spouse who — had their marriage been previously recognized — would have required spousal consent prior to payment or may have provided a joint and survivor benefit. Though additional guidance on retroactive claims is anticipated, the current plan of action is straight forward for benefit administrators: communicate with employees, review plan documents and provisions with providers, and update forms and employee records as necessary.
Mickie Murphy, Director, Employee Benefit Plans
mickie.murphy@CLAconnect.com or 815-729-9421