Who is the Spouse?

The Supreme Court repealed Section 3, a key portion of the Defense of Marriage Act (DOMA), on June 26, 2013. Section 3 prevented the federal government from recognizing marriages of same-sex couples. Section 3 was declared unconstitutional because it violates the Constitution’s equal protection promise. The following article from Swerdlin & Company addresses what this means for employee benefit plans. 

On August 29, 2013, the Internal Revenue Service (IRS) issued Revenue Ruling 2013-17 providing guidance with regard to this repeal. For federal tax purposes, the terms “spouse”, “husband and wife”, “husband” and “wife” now include an individual married to a person of the same sex. The term “marriage” now includes a marriage between individuals of the same sex, as long as the individuals are married under any law that authorizes same-sex marriage, even if the couples resided in a state that does not recognize same-sex marriage. For qualified retirement plans, operational compliance is effective as of September 16, 2013.

What does this mean with regard to employee benefit plans? This can have a major effect on employers’ health benefit plans. Generally, an employee is not taxed on health insurance provided by an employer or amounts received as reimbursement for medical care expenses. The exclusion is available for the medical expenses of the employee, his or her spouse, and dependents. With the repeal of Section 3 of DOMA, now coverage for a same-sex spouse is also not taxed.

Is an employer required to extend cafeteria plan benefits to a same-sex spouse? Under current federal law, an employee may now pay for health/dental coverage for a spouse of a legally married same-sex couple on a pre-tax basis and without imputing income to the employee. Cafeteria plans are governed by federal law and are now required to extend coverage to a spouse of a legally married same-sex couple.

Qualified retirement plans are governed by ERISA and the Internal Revenue Code. This means these plans are subject to federal law. Therefore, a spouse of a legally married same-sex couple is now recognized whether the couple resides in a jurisdiction that recognizes same-sex marriage or resides in one that does not.

A pension plan and certain other qualified retirement plans are generally required to pay a married participants benefits in the form of a qualified joint and survivor annuity (QJSA) unless the participant elects otherwise. If the participant is married, the spouse must consent in writing to the participant’s election.

A participant in a defined contribution plan, such as a 401(k) plan, can choose to leave the balance in the account to any beneficiary. However, if the participant is married, the amount can be left to a non-spouse beneficiary only if the participant’s spouse consents to this in writing. Furthermore, the ability of a plan participant to take certain actions is limited if the plan participant is married. For example, if a qualified plan is subject to survivor annuity requirements, a married participant must obtain spousal consent for any plan loan if more than $5,000. On the other hand, the required minimum distribution (RMD) rules are generally more liberal for defined contribution plan participants who are married as opposed to those who are not. Thus, same-sex couples may benefit from the RMD rules.

May a same-sex spouse obtain a qualified domestic relations order (QDRO)? A same-sex spouse may now be covered by a QDRO. With a QDRO, a spouse has the right to share in the pension benefits of the other.

Will a same-sex spouse be permitted to elect a direct rollover from a qualified retirement plan? Since a spouse of a legally married same-sex couple is now recognized as a spouse under federal law, the distribution of an employee’s benefit to a same-sex spouse is permitted to be rolled over to another plan or to an individual retirement account in order to defer income tax. Because this is a federal tax rule, an employer cannot provide different treatment under their plan.

Can a participant be permitted to take a hardship distribution for expenses incurred by a same-sex spouse? Since a spouse of a legally married same-sex couple is recognized as a spouse under federal law, a hardship distribution is now permitted for the medical, educational or funeral expenses for a same-sex spouse, regardless of whether the same-sex spouse qualifies as a dependent under the Code.

In light of these recent developments, employers should establish a process to identify married participants. All plan documentation needs to be carefully reviewed for the definition of “spouse” to determine whether any changes are necessary. Please feel free to contact Smith and Howard to assist you with this review process.

Contributed by:

Swerdlin & Company, Actuaries and Employee Benefit Consultants

phone 770-396-6601, www.swerdlin.net