For many Americans, the U.S. Supreme Court’s decision in U.S. v. Windsor, which found a principal portion of the Defense of Marriage Act (DOMA) unconstitutional, was a validation of one of the most personal and important decisions one makes during a lifetime—who they marry.
However, the decision also has significant implications for one of the most important aspects of a person’s employment relationship—the health, retirement and other benefits provided to workers and their families.
The Court’s decision corrected some inequitable rules that applied to legally married same-sex couples and the employer administrative and cost burdens that accompany those inconsistencies. But DOMA’s demise fails to fix all of the issues, and it raises a plethora of other questions for both workers and companies. Guidance from the federal government is needed quickly to answer those questions.
The American Benefits Council joined with nearly 300 private and public employers in filing a friend-of-the-court brief, urging the Supreme Court to strike down DOMA, specifically because of the problems it caused in the provision of employee benefits.
As Justice Kennedy wrote in the majority opinion, “DOMA raised the cost of health care for families by taxing health benefits provided by employers to their workers’ same sex spouses.”
Because of DOMA, when a company provides health coverage to a worker’s same-sex spouse, as many employers do, the employee has to pay tax on the value of that coverage, whereas no tax applies when employer coverage is extended to an opposite-sex spouse. So, two legally married employees living in the same state and receiving the same employer-sponsored spousal health coverage have different tax consequences. And both the company and the employee are subject to payroll taxes on the same-sex spouse coverage as well.
The disparate treatment also extended to retirement benefits. Prior to the court’s decision, same-sex spouses were accorded different treatment than opposite-sex spouses with regard to pension survivor benefits, hardship withdrawals from 401(k) plans, and rights to a pension benefit in the case of a divorce. Striking down DOMA should help resolve these inconsistencies, at least for employees that live in those states that recognize same-sex marriages.
But myriad questions now arise. Is the ruling prospective-only or does it give rights retroactively to benefits that were previously not received? Are employers and workers entitled to refunds from the government for payroll taxes that were imposed on health coverage provided to same-sex spouses? Are employers expected to change their payroll withholding systems immediately or will they be given a reasonable period of time to make these massive information technology accommodations? To what extent and how quickly must employers amend the terms of the benefit plans they sponsor?
And because the Court’s decision does not require the 38 states that do not legally recognize same-sex marriage to honor same-sex marriages performed in other states, the inequitable tax treatment and administrative burdens still apply due to the inconsistencies in state law. When an employee and her or his same-sex spouse move from a state that recognizes same-sex marriage to one that does not, challenging decisions regarding tax withholding and other benefit matters will fall to the employer.
It will take some time—and presumably litigation—for all these and other questions to be resolved. In the meantime, the Internal Revenue Service and other regulatory agencies should give as much clarity—and as much flexibility—as possible to employers. Sponsoring employee benefits is an extraordinarily costly and complex enterprise for employers.
The high court’s landmark decision settles many matters at the core of a national policy debate, but leaves numerous practical questions unanswered. Many employers have been providing benefits where none are required by law and they should be permitted to continue doing so with the least disruption and liability possible.
James A. Klein is president of the American Benefits Council, the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council’s members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.