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.