Lawyers Journal

SCOTUS strikes down DOMA; Impact on Business Law

On June 26, 2013, the United States Supreme Court invalidated the Defense of Marriage Act in United States v. Windsor. The decision struck down a key section of DOMA, which defined marriage as between a man and a woman for the purpose of federal law.

Advising business law clients after Windsor and the demise of DOMA


The United States Supreme Court held Section 3 of the Defense of Marriage Act, 1 U.S.C. § 7, unconstitutional on equal protection grounds. Section 3 of DOMA defined marriage for federal purposes, as between a man and a woman only. Section 2 of DOMA, 28 U.S.C. § 1738C, which was not challenged in Windsor, allows states to refuse to recognize same-sex marriages performed under the laws of other states. Windsor does not affect state laws which currently prohibit same-sex marriage. The resulting revision of federal regulations and laws will have a major impact on the practicing business lawyer whether in-house or at the individual client level. As is often the case with U.S. Supreme Court decisions, more questions seem to have arisen than were answered. This article will provide a 50,000-foot overview of the Windsor decision, highlighting some of the challenges faced by business law practitioners, with a focus on in-house counsel and representing the individual client. It is by no means exhaustive in its review. Careful analysis of state versus federal laws and regulations will be required by those practicing in the business area. As always, consult with qualified counsel for specific advice.

Advising business clients


What standard to use?

One of the threshold issues since the Windsor decision involves how states and federal agencies currently recognize marriage. Some federal agencies adhere to what is known as a "place of celebration" standard, which means that no matter where a couple is legally married anywhere in the world, the union is recognized for the purpose of federal benefits. However, some federal agencies use the "place of residence" standard to determine whether a same-sex marriage is recognized.

Both the Internal Revenue Service and the Social Security Administration use the "place of residence" standard, meaning the marriage has to be recognized in the place the couple is living for them to be eligible for those federal spousal benefits. There is no methodology to where and under what circumstances each standard may be used, requiring a careful hand when advising clients and examining each agency's rules and guidance. For example: the Department of Defense has a "place of celebration" marriage standard for military members, while the Department of Veterans Affairs has a "place of residence" standard for veterans. This translates into potentially very different consequences for two sets of benefits that are closely-related.

Family Medical Leave Act


In-house counsel should consider a likely increase in leave requests under the Family Medical Leave Act, (29 U.S.C. § 2601, 29 CFR 825). Currently, up to 12 weeks of unpaid job protected leave is given to eligible employees to care for spouses. FMLA regulations currently look to an employee's state of primary residence to determine whether a person is considered a "spouse." Since Section 2 of DOMA allows states to refuse recognition of same-sex marriages from other states, an employee moving from a state that recognizes same-sex marriage to one that does not, could create a legal dilemma for an in-house counsel when faced with such a request for leave, since the location of the company is not determinative. As it currently stands, FLMA will apply to those in the 13 states that recognize same-sex marriage. Given this nuanced structure in-house counsel should ensure their companies policies are updated accordingly and monitor guidance from the U.S. Department of Labor, which enforces FMLA.

Employer benefits


Federal law, the Employee Retirement Income Security Act (ERISA) (Pub. L. 93-406, enacted Sept. 2, 1974, codified in part at 29 U.S.C. ch. 18), governs most private employer-sponsored benefit plans. Spouses named as beneficiaries currently receive benefits for rollovers of 401(k) plans; this is not the case for non-spouse beneficiaries. With the overturning of a federal definition of marriage, 401(k) plan beneficiary changes would now require the consent of the same-sex partner. This issue is further complicated when dealing with 403(b) (public education and some non-profit plans), which can be exempt from ERISA and thus subject to state law, which as discussed above, can differ on the subject of same-sex marriage.

As to group health plans, whether a plan had to cover same-sex spouses depended on whether the plan was self-insured or not, because ERISA does not preempt a state's right to regulate insurance. Thus, states that recognize same-sex marriage often mandated that group health insurance contracts provide coverage for same-sex spouses.

Advising individual clients


Income Tax

Pre-Windsor, same-sex couples generally chose to file federal tax returns as "single," with some filing as "head of household," if they had children. Now, same-sex couples will need to file join tax returns or married filing separately. Clients should be made aware that this could result in their paying more or less tax on income. Additionally, initial guidance indicates that couples that were married up to three years ago will have the option to amend federal returns for the preceding three years. Whether or not they must amend all the returns for the three returns or can selectively chose to amend where it benefits them remains to be seen.

A further wrinkle arises when determining marital status. If the filer was married in a state that recognizes same-sex marriage, such as Massachusetts, the determination is easy. Not so for those married in one state and living in a non-same-sex marriage state. The income tax situation becomes further complicated when a same-sex couple works in multiple states. In such a situation, absent further guidance, a joint federal return will need to be filed, with single status being claimed on some state returns.

Bankruptcy

Prior to Windsor, two separate petitions were required when same-sex couples filed for bankruptcy, creating additional expenses and time. Further, same-sex spouses did not have the benefit of the greatly increased exemptions claimed in bankruptcy with the addition of a spouse. In addition, an automatic stay is granted to both spouses once the bankruptcy is filed which protects from both foreclosure and creditors. Windsor provided more clarity in this area to same-sex couples, but questions remain, which will likely be resolved through litigation and further federal action.

Estate planning

Pre-Windsor, same-sex couples were not granted the spousal exemption for gifts or transfers. Now, same-sex married couples will be granted the same federal estate and gift tax benefits as their heterosexual counterparts. Same-sex couples are now allowed the advantage of gift splitting, with the amount given considered as made by one-half by each spouse.

What's next


Shortly after the Windsor decision was rendered, President Barack Obama directed the U.S. Department of Justice to review relevant federal statutes to determine the need for additional guidance on statutes impacted by the decision and the IRS stated that it plans to provide revised guidance in the near future.

For those practicing in Massachusetts, the legal questions may not be as daunting when dealing with couples that live in, and were married in, Massachusetts. However, those in other states that do not recognize same-sex marriage should pay heed to the unanswered questions regarding state law and residency/domicile issues and be on the alert for guidance from the federal government.

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