This article, based on "Same-Gender Marriage Developments Force Benefit Plan Sponsors to Reconcile Conflicting Messages" published June 29, 2006, analyzes the effects of two recent court decisions on the same-gender marriage debate. On July 6, 2006 the New York Court of Appeals refused to recognize same-gender marriage. Also on July 6, the Georgia Supreme Court reversed a lower court decision and reinstated its constitutional amendment banning same-gender marriage.

Federal and state courts, legislatures, and voters in the United States have recently weighed in on the debate surrounding the legal recognition of same-gender marriage. Unfortunately, those voices give employers a number of mixed messages with respect to how they should treat same-gender couples under their benefit plans. Canada, and most recently Spain, have joined the Commonwealth of Massachusetts in legalizing same-gender marriage, and Connecticut recently enacted a "civil union" law making it the fifth state to offer marital-like benefits to same-gender couples. In contrast, in 2006 New York’s highest state court refused to legalize same-gender marriage, and in the 2004 elections, voters in all 13 states considering same-gender marriage approved constitutional amendments to ban it by specifically defining marriage as between one man and one woman. Last month, the U.S. Senate considered (but ultimately rejected) a proposal to amend the U.S. constitution.

In light of these conflicting trends and the prevalence of spousal rights and features in employee benefit plans, employers should consider the following issues as they design and administer their plans.

Same-Gender Marriage Developments

Supporting Same-Gender Marriage

On May 17, 2004, Massachusetts became the first (and so far, the only) U.S. state to legalize same-gender marriage. More than 7,000 same-gender couples have already been married in Massachusetts. Similar cases are currently working their way through the California, Maryland, New Jersey and Washington state court systems.

Outside of the courts, several state legislatures have enacted statutes that provide marital-type rights to same-gender couples. For instance, domestic partner laws in New Jersey, California and the District of Columbia and civil union laws in Vermont and Connecticut provide registered domestic partners and same-gender couples entering into a civil union, respectively, the same rights, benefits, duties and responsibilities bestowed upon married couples in those states. Similar legislation has been proposed in Colorado and Oregon. California legislators recently entered the discussion and passed legislation authorizing marriage between same-gender couples. This was the first law of its type ever passed in the United States independent of a judicial ruling; however, California Governor Arnold Schwarzenegger ultimately vetoed the legislation.

Rejecting Same-Gender Marriage

Despite progress in some states, there has been significant nationwide backlash to this trend. Specifically, the federal Defense of Marriage Act (DOMA) allows states to refuse to recognize other states’ same-gender marriages. Pursuant to the federal DOMA, 45 states have laws or constitutional provisions (often called mini-DOMAs) prohibiting the performance of same-gender marriage in their states and the recognition of same-gender marriages performed in other states. After Massachusetts legalized same-gender marriage, in 2004 voters in 13 other states (Arkansas, Georgia, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Montana, North Dakota, Ohio, Oklahoma, Oregon and Utah) overwhelmingly approved constitutional amendments banning these marriages.

Courts have disagreed on the validity of state laws limiting marriage to one man and one woman. On one hand, in May 2005 a federal district court in Nebraska struck down the first state constitutional amendment banning same-gender marriages. The court concluded that the Nebraska amendment, passed overwhelmingly by voters in 2000, went "far beyond merely defining marriage as between a man and a woman." It "impose[d] significant burdens on both the expressive and intimate associational rights" of gay men and lesbians "and create[d] a significant barrier to the plaintiffs’ right to petition or to participate in the political process." In February 2006, the U.S. Court of Appeals for the Eighth Circuit heard oral argument in the case. In addition, a Maryland court recently struck down that state’s ban on same-gender marriage finding that it violated the state’s constitutional promise of equal gender rights.

On the other hand, courts in other states have upheld similar laws and constitutional provisions, including those in Oregon and Florida. On July 6, 2006, the New York Court of Appeals (the state’s highest court) refused to recognize same-gender marriage. The court found that "there are rational grounds on which the Legislature could choose to restrict marriage to couples of opposite sex," including the welfare of children. That same day, the Georgia Supreme Court reversed a lower court decision and reinstated that state’s constitutional amendment banning same-gender marriage. The amendment, which had been adopted by voters in the 2004 election, had been struck down by a lower court on grounds that it impermissibly addressed more than one issue, including civil unions.

Adding to the confusion, court decisions in the last 12 months have potentially limited the scope of same-gender rights. The supreme courts of California and Oregon overturned lower court decisions and invalidated "civil disobedience" marriages performed in 2004 in San Francisco and Multanomah County, respectively, stating that the local officials who issued the marriage licenses to same-gender couples did not have authority from the states to do so. In March 2006, the Massachusetts Supreme Judicial Court limited the scope of its landmark 2004 ruling by applying a 1913 law—originally designed to prevent interracial marriages—to deny marriage licenses to out-of-state same-gender couples. New York’s highest state court recently rejected a New York City Equal Benefits Law (EBL) requiring entities contracting with the city to provide domestic partner benefits. According to the New York State Court of Appeals, both the Employee Retirement Income Security Act of 1974 (ERISA) and New York state’s competitive bidding law pre-empted the EBL.

What Can Employers Do? Three Questions to Ask

Given this conflicting legal environment, employers are challenged to determine what actions to take regarding domestic partner and same-gender spouse benefit coverage. A 2004 survey by Mellon Financial Corporation revealed that 28 percent of responding employers have received employee inquiries about benefits for same-gender spouses. However, 82 percent of those same employers do not have a strategy in place to handle such inquiries.

The most common employee requests for same-gender spouse benefits are for coverage under health and dental plans and spousal survivor annuity coverage under defined benefit pension plans. When presented with a request to provide benefits to same-gender spouses under any type of employee benefit plan, an employer should ask the following questions:

Where was the marriage performed?

The jurisdiction in which the same-gender marriage was performed affects the "legality" of the marriage, and thus, the plan’s obligation to recognize it. Was the employee legally wed in Massachusetts or Canada, for example? Or, did the employee participate in a marriage of "civil disobedience" performed in various locations around the United States (including San Francisco and counties in New Mexico, New Jersey, Oregon and upstate New York) but not recognized by any state?

Where does the employee live?

The employer’s response may also depend on whether the employee lives in a state with a mini-DOMA or state with no mini-DOMA. If the employee lives in a mini-DOMA state, the employer does not have to recognize same-gender marriages for plan eligibility purposes, although many employers voluntarily choose to extend eligibility in this situation. If eligibility is extended, it is considered an optional benefit akin to a domestic partner benefit program. (Note the tax consequences discussed below.)

If the employee resides in a state without a mini-DOMA, the employer may have to recognize same-gender marriage for plan eligibility purposes, depending on whether the plan is a self-insured plan or a fully insured plan. This is because self-insured plans (i.e., plans that pay benefits out of company general assets) are governed only by federal law (including ERISA and the Internal Revenue Code) and have the flexibility to recognize or not recognize otherwise valid same-gender marriages. However, insured plans are subject to state law benefit mandates and may have to recognize same-gender marriages depending upon where the policy is issued. For example, under the California Insurance Equality Act, insurance policies issued in California must cover registered domestic partners, and insurance policies in Massachusetts now cover same-gender spouses.

What is the plan’s definition of "spouse"?

In addition to determining what law applies to the plan, employers must also decide how to define or interpret the term "spouse." If the plan does not define the term or simply incorporates a state law definition of spouse, it should be amended to clarify the definition the employer wishes to use.

Tax Consequences

If an employer does cover same-gender spouses under its health plan, it must understand the related tax consequences. The federal DOMA provides that, for all purposes of federal law, the definition of "marriage" is limited to the legal union between one man and one woman as husband and wife, and the word "spouse" means only a person of the opposite gender. For example, the federal DOMA prevents same-gender spouses from receiving benefits offered under federal statutes, including the Family Medical Leave Act, ERISA and the Internal Revenue Code. As a result, same-gender spouses (e.g., those legally married in Massachusetts or Canada) will not receive any federal tax advantages associated with employee benefit plans unless the same-gender spouse meets the Internal Revenue Code definition of "dependent."

In this situation, the employer must impute income to the employee equal to the fair market value of the health coverage given to the same-gender spouse. In addition, the employee may not make pre-tax contributions to a section 125 cafeteria plan on behalf of the same-gender spouse (i.e., contributions for the spouse must be after-tax) and may not receive reimbursement for the expenses of the same-gender spouse from flexible spending accounts (FSAs), health reimbursement accounts (HRAs) or health savings accounts (HSAs), unless the same-gender spouse meets the revised Internal Revenue Code definition of dependent.

State tax treatment depends again on whether the employee resides in a mini-DOMA state or a state without a mini-DOMA. In mini-DOMA states, employers must impute income for state tax purposes equal to the fair market value of the benefit coverage provided to same-gender "spouses" as they do for federal tax purposes. (The New York State Department of Taxation and Finance recently issued two advisory opinions confirming this treatment for New York residents.) In states without a mini-DOMA that recognize same-gender marriage or that have special laws favoring domestic partners (e.g., Massachusetts, Vermont, Connecticut, New Jersey, California and the District of Columbia), employers will have to subtract, for state tax purposes, any income imputed to the employee for federal tax purposes, thereby creating an additional administrative hurdle.

Steps Employers Should Take Now

Whether or not faced with a request for benefits from a same-gender couple, employers should consider the following issues in formulating their policies:

Analyze Existing HR Policies

If the employer has a policy banning sexual orientation discrimination, the employer may wish to cover same-gender spouses, regardless of legal requirements, in order to avoid the possibility of lawsuits by same-gender spouses for sexual orientation discrimination. With respect to non-ERISA plans, the employer may want to consider whether state or local laws prohibit employment discrimination on the basis of sexual orientation. Numerous states have such laws—Illinois most recently enacted such a statute—that could easily apply to a failure to provide employee benefits. For example, a New Hampshire district court recently found that a public employer’s refusal to provide health and leave benefits to same-gender couples violated the state’s anti-discrimination statute.

Determine the Home State’s Legal Requirements

If the employer’s home state recognizes same-gender marriages, the employer may have to cover same-gender spouses in its fully insured plans, and the employer should consider amending its plans to cover same-gender spouses. If, however, the employer’s home state does not recognize same-gender marriages, then the employer’s plans may not have to cover same-gender spouses. In this case the employer should consider amending its plans to reflect the DOMA definition of "spouse." Obviously, this analysis can be very complicated for employers operating in multiple states.

Talk to the Health Insurance Provider

Determine what action vendors and insurers are taking and where the insurance policies are sited. Depending on which state insurance laws govern the insurer, the insurer may require the employer to provide coverage of domestic partners and/or same-gender spouses that the employer has not considered.

Review Plan Documents, SPDs, Enrollment Forms and Administrative Procedures

Inventory where the employer’s plan documents use the term "spouse." Consider adding, clarifying or amending the definition of "spouse" and requiring additional proof of employee marriages (e.g., spouse’s gender, state of marriage and licenses). Ensure that all plan documents have appropriate Firestone language providing for plan administrator discretion in interpreting the plan.

Coordinate Plan’s Same-Gender Spouse and Domestic Partner Coverage

If the employer has a domestic partner plan, then the employer may wish to enroll same-gender spouses as domestic partners, even if the employer is in a mini-DOMA state. (Note that "spousal" coverage under an employer’s health plan may cost less and have different state income tax treatment than domestic partner coverage. The employer also should carefully consider the potentially discriminatory consequences of imposing any domestic partner eligibility requirements on same-gender couples that the employer does not impose on opposite-gender couples.) If the employer does not have a domestic partner plan, then the employer may wish to rely on the federal and/or state DOMAs to exclude same-gender spouses from its plans.

Ensure the Payroll Department Can Address Taxation Issues

To the extent that the employer will provide any sort of same-gender or domestic partner coverage, it will need to work with its payroll department to ensure that the payroll department can accurately comply with the tax consequences described above.

Communicate to Employees

If the employer chooses to provide coverage to same-gender spouses and/or domestic partners, the employer will want to consider how to best communicate its offering. There may be employee recruiting and retention advantages and possibly customer contracting advantages the employer may want to highlight. However, these benefits may offend some employees, shareholders or customers, so the employer may decide that a more "low key" rollout is appropriate.

Stay Abreast of Local and National Legislation

This area of law is constantly evolving and new developments occur on an almost weekly basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.