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Same-Sex Marriage and Your Plans: Be Aware of the Impact

Posted in Plan Administration, Retirement Plans, Welfare Plans

In the excitement over the presidential election, it might have been overlooked that voters in the states of Maine, Maryland and Washington voted to approve same-sex marriages.  As more states recognizes same-sex marriages and civil unions, it is important to for plan administrators and sponsors to be keenly aware of the ongoing conflict between federal and state law related to these relationships. 

First, let’s review retirement plan concerns.  Qualified retirement plans are generally governed by ERISA and various corresponding tax regulations.  All of these regulations are subject to the impact of the federal Defense of Marriage Act.  While this Act is subject to various disputes right now, it is still the law so it has to be followed.  The net effect is that when considering the term "spouse" in your qualified plans, it does not include a same-sex partner, married or otherwise.  So any provision in a plan that provide for benefit to a "spouse" would not apply to a same-sex spouse even when married under state law.  For example, consider a defined benefit plan distribution that requires spousal consent for distribution.  A partner in a same-sex marriage is not required to obtain spousal consent because in the eyes of the plan, he or she has no spouse.  Similarly, any spousal rights that may accrue as a result of the death of the participant under the terms of the plan would not accrue to the same-sex partner. 

Second, when we look at welfare plans, all of the dependent coverage definitions in the plan referring to "spouse" would not automatically include the same-sex spouse.  Certainly a plan can add coverage for same-sex partners, but doing so does not grant them the federal protections of things like COBRA (which would not apply since the dependent would not be recognized as a spouse under federal law).  Cafeteria plans cannot provide benefits to same-sex partners, which means that employees cannot pay that portion of their health coverage attributable to same-sex partners with pre-tax dollars.

This is not to say that plans, retirement or welfare, cannot be amended or designed to recognize and benefit same-sex spouse.  What is does mean, though, is that plan administrator have two particular concerns.  One, if the plan administrator does decide to recognize same-sex partners as spouses, it has to be very careful to administer benefits in accordance with federal law.  Second, the plan administrator has to be very careful to make sure that it is not providing benefits improperly because of lack of diligence.  Plan administrators should be very careful about enrollment of participants, particularly in states recognizing same-sex marriage and domestic-partners.  Participants have to be advised of the distinction between state and federal law and how benefits may or may not be administered for their same-sex partners.

Finally, there are tax concerns.  Because the amount of the benefits for the same-sex partner are disallowed for federal tax purposes, the employers’ withholding responsibilities are calculated based on the total gross compensation that includes the value of the benefits to the same-sex partner and has to take into account that the premiums paid are not using pre-tax dollars.  Plus the level of withholdings for state purposes might be different from the withholdings for tax purposes.  An employee in a same-sex marriage could be "married" with two dependents for state tax withholding purposes, but "single" with no dependents for federal tax purposes.  So employers can no longer assume all withholdings based on a single W-4 for same-sex couples.  They have to be wary of these distinctions between state and federal taxes.

So plan sponsors, as both keepers of benefit plans and employers paying taxes have to be cognizant of the impact of adding coverage for same-sex partners.  Changing laws require attention to detail, which in turn avoids problems in the future.  For assistance in dealing with this issue in your plans, or your payroll, ask for assistance from your attorney at Fox Rothschild.