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On June 26, 2013, the United States Supreme Court held, in a 5-4 decision, that the federal Defense of Marriage Act, or DOMA, is unconstitutional and that it is a "deprivation of the essential part of the liberty" protected by the Fifth Amendment to the U.S. Constitution. United States v. Windsor, 570 U.S. __ (2013). The Windsor decision focused primarily on section three of DOMA, which provides that for all purposes of federal law, marriage means "only a legal union between one man and one woman as husband and wife." It further states that "spouse" refers "only to a person of the opposite-sex who is a husband or wife." By striking down this section of DOMA, the Supreme Court has now provided same-sex couples, who are lawfully married pursuant to state law, with equal access to the multitude of rights and benefits currently only available to opposite-sex couples under federal laws and regulations. Same-sex marriage is legal in New Hampshire as well as in 12 other states (including all of the other New England States) and the District of Columbia.¹
As analysis and review of the Windsor decision unfolds, what can be determined immediately about the effect of this decision?
Federal tax benefits. Most obviously, the Court's decision will now permit the estates of deceased same-sex spouses to pass property to their surviving spouse estate-tax free under the federal Tax Code. More broadly, the various provisions of the Tax Code that favor spouses — or former spouses in divorce proceedings — will now apply to same sex spouses. Spouses can gift to each other tax-free, or treat gifts to others as being split between them, thus reducing the federal gift tax effect of the transfer. Spouses can file personal income tax returns jointly, benefiting from the combined deductions and credits available to them as a couple. Until now, none of these federal tax benefits have been available to gay married couples.
Workplace Retirement Plans. The federal Employee Retirement Income Security Act, or ERISA, governs the administration of federal retirement and health plans. In addition, portions of the Tax Code also regulate the administration of qualified retirement plans. These statutes provide, for example, that the spouse of a participant has special rights to the receipt of a benefit on account of the death of the working spouse. A married participant cannot name a beneficiary other than a spouse, unless the spouse first agrees in writing. A married participant cannot waive the receipt of a joint and survivor annuity under a pension plan, unless the spouse consents in writing to the receipt of another form of benefit that may leave the surviving spouse less. These spousal protections will now be available to same-sex spouses. If a married couple divorces, ERISA permits the tax-free division of a participant's account. Previously, the same-sex, married working participant would pay income tax on account of this division.
Distributions from IRAs and 401(k)s. Surviving spouses have more flexibility when deciding how to receive distributions from a qualified account, to control the income taxation of the benefit. Unlike other beneficiaries, surviving spouses can choose to roll over the account to a new IRA of their own and name a further beneficiary, wait until a later date to take distributions, or decide instead to take out money sooner, even before 59 ½, without paying a penalty like other beneficiaries. After Windsor, same-sex spouses benefit from these spousal advantages.
Workplace Health and Welfare Plans. The business and personal income tax treatment of health benefits for same-sex couples has been a thorn in the side of human resources professionals. The cost of worker benefits, and the benefits provided to spouses and dependents, is not included in income for individual or business income tax purposes. However, premiums paid by employers or employees for their nondependent same-sex spouse are taxable and so must be segregated in the payroll process and reported separately. No more. In addition, HRA and FSA accounts can be applied to same-sex spouses' medical expenses. COBRA continuation of health coverage will be available for same-sex spouses in the event of the employee-spouse's death or Medicare enrollment, or upon divorce.
Social Security. Benefits will be available to a surviving spouse on the first spouse's death equal to the greater of the deceased spouse's benefit or the survivor's benefit
Divorce. When a married couple divides assets upon divorce, the Tax Code allows the transfer of property between them without the assessment of a transfer/gift tax or income tax. A same-sex couple married under state law may divorce under state law, but if the federal tax law is not in sync with their status, then the divorcing couple suffers further financial burden. This will no longer be the case.
Medicaid Eligibility for Nursing Home Care. Like other married couples, the total assets of a gay married couple will now be counted when determining if the ill spouse will qualify for Medicaid.
Family and Medical Leave Act. The Family and Medical Leave Act of 1993, or FMLA, requires, among other things, that covered employers grant eligible employees time off to care for their seriously ill "spouse." Under DOMA, the term "spouse" meant only "a person of the opposite sex." In the wake of the Windsor decision, employers must now consider whether an employee who has legally married his or her same-sex partner is also eligible for FMLA leave to care for his or her seriously ill spouse.
Other implicated areas of the law include citizenship status for non-U.S citizens married to U.S. spouses and veterans' and military benefits for families and spouses of service members, whether actively serving, retired or deceased, and federal benefits available to families of government workers.
What considerations are not affected by this major decision?
State laws that prohibit same-sex marriage or do not recognize same-sex marriages from other jurisdictions remain unchanged. Already, there is discussion that these state laws may change or be challenged. In the meantime, gay married couples who move from a state where they are legally married to a state that does not recognize their marriage will face uncertainty about their status until this new "disconnect" is better understood or resolved. For New Hampshire "snowbirds," note that Florida law prohibits same-sex marriage and does not recognize this status if granted in other states.
What can same-sex couples do now to avail themselves of the new federal protections?
First, couples must be married under state law to benefit from this dramatic federal law change. After that, it is not clear exactly when — or how far back — this decision will change existing law. Couples should discuss with their tax preparer whether they would benefit from filing an amended income tax return for prior years, to now file as "married filing jointly" rather than as separate taxpayers. Members of couples who have lost employer-provided health insurance for a COBRA-related reason may now be eligible for COBRA continuation coverage. Couples involved in a legal process with federal law implications — for example divorce, citizenship or Social Security filing — will want to determine whether the Windsor decision might alter the course of their matter.
The reach of the Windsor decision is stunningly broad. Accountants, tax preparers, attorneys, business owners, human resources professionals, employees, governments and individuals should prepare for a range of questions and challenges as we begin to interpret and apply this new view of marriage in our lives and workplace.
¹In a companion decision, also issued by the Supreme Court on June 26, 2013, the Court declined to decide an appeal from California, effectively authorizing same-sex marriage in that state. Hollingsworth v. Perry, 570 U.S. __ (2013).
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