DOMA’s Tax Benefit Implications

In 1996, President Bill Clinton signed DOMA into law. Section 3 of DOMA defines “marriage” as a legal union between one man and one woman, and defines “spouse” as a husband or wife of the opposite sex.  However, on June 26, 2013, in the case United States v. Windsor, the Supreme Court held that Section 3 of the Defense of Marriage Act (“DOMA”) violated the Fifth Amendment of the United States Constitution. The Supreme Court reasoned that the definition of “marriage” and “spouse” as a union between a man and a woman under Section 3 of DOMA deprived same-sex couples of their constitutionally granted personal liberties. As a result of this decision, same-sex couples who are lawfully married under state law must be afforded the same federal rights and protections possessed by opposite-sex couples.

At the time of enactment, Section 3 of DOMA prevented same-sex couples from receiving the same employee benefits from their employers as opposite sex couples, even if the employee resided in one of the thirteen states or the District of Columbia that recognized same-sex marriage. In the past, this provision has impeded same-sex couples from enjoying other benefits enjoyed by opposite-sex couples, such as Social Security and death benefits. However, by striking down Section 3, the decision will provide for same-sex marriage to be recognized under Federal Law and will allow for same-sex couples to enjoy more of the same benefits as opposite-sex couples.

Notably, these benefits may be limited by the fact that the Supreme Court decision did not rule on Section 2 of the Act; which allows states that have not passed same-sex marriage laws the right to refuse to recognize same-sex marriages legally performed in other states. Due to such discretionary power, questions have now been raised as to what kind of implications DOMA has on employee benefits as it pertains to same-sex couples across the United States.

For example, same-sex couples whose marriage is valid in their state of residency[1] can now apply for Social Security benefits on their spouse’s earnings, as well as survivor benefits in the case of a spouse’s death. However, this has been complicated by DOMA for same-sex couples residing in states that do not recognize same-sex marriage because Section 2 remains in-tact.  Whether these benefits will be provided to same sex spouses residing in states that do not recognize same sex marriage still requires clarification.

Impact on Group Health Benefits

Prior to Windsor, employers who provided benefits to an employee with a same-sex spouse had to impute the benefits as taxable income to the extent that the coverage paid for the employee’s same sex spouse, regardless of the state’s laws on same-sex marriage.  At that point and time, benefits provided to a same sex spouse could have been excluded from  the employee’s taxable income only if the same same-sex spouse or domestic partner qualified as a “dependent” under the Internal Revenue Code Section (“§”) 152(d)(1)(A) and (C). Under this section, a same sex spouse would qualify as a dependent if: 1. the employee taxpaying spouse provides the same spouse with more than half of the spouse’s monetary support for the taxable year; and  2. the employee taxpayer and the spouse share a principal place of residence for the entire taxable year; and 3. the relationship does not violate local law at any time during the taxable year, pursuant to Code §152(f)(3). However, in light of the Windsor decision these guidelines are subject to change. The Internal Revenue Service (“IRS”) has stated that it is currently reviewing these guidelines and “will be working with the Department of Treasury and Department of Justice, and [] will move swiftly to provide revised guidance in the near future.”  It is most likely that these benefits will now be excluded from the employees taxable income without having to satisfy dependency status under § 152.

In the event that DOMA is applied retroactively, employers that have already been providing health benefits to same-sex spouses might be able to seek a refund for the past three years that the company provided those benefits. Due to the three-year statute of limitations for claiming tax refunds, employers would not be permitted to file for refunds for same-sex couples married prior to 2010, unless the employer filed a protective claim.

Impact on Employers that Do Not Currently Offer Benefit Plans for Same-Sex Spouses

The Windsor decision, because it kept Section 2 of DOMA intact, does not appear to require employers to change their benefit plans to offer benefits to same-sex spouses if the employer does not currently offer such benefit plans and the employer is located in a state that does not recognize same-sex marriage.

But what about employers that do not currently offer benefit plans to same-sex spouses but reside in a state that recognizes same-sex marriage?

At the moment, the Windsor decision is not completely clear on whether employers in this position would be required to change their benefit plans to provide benefits for same-sex spouses. Employers in this position should seek legal advice regarding the new law if they do not intend on changing their company benefit plan to accommodate same-sex spouses.

Thus, while the Windsor decision addresses some issues regarding same-sex marital rights, some gray areas still remain that require further clarification from the federal government. Employers across the nation should stay alert as the federal government and state governments continue to develop this area of employee benefit laws in response to this pivotal decision.

If you or your company would like more information on employment law, contact James G. Ryan at jryan@cullenanddykman.com or via his direct line at 516-357-3750.

A special thank you to Cathryn Ryan, an intern, and Melissa Cefalu, a law clerk, at Cullen and Dykman, for their assistance with this blog post.