The Windsor Decision & Employee Benefits: What You Should Know April 24, 2014 Jonathan D. Karelitz

2 Today’s Roadmap DOMA and the Windsor Decision Current Landscape Re: Same-Sex Marriages Nationwide Windsor’s Impact on Qualified Plans Windsor’s Impact on Welfare Plans Employer and Employee Action Steps Tough Questions & Need for More Guidance

Federal Defense of Marriage Act (DOMA)  Effective September 21, 1996  Section 1: Title  Section 2: Full Faith and Credit One state does not have to recognize same-sex marriage of other states  Section 3: Definition of “Marriage” “In determining the meaning of any Act of Congress, or of any ruling, regulation or interpretation of the various administrative bureaus or agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.” 3

Impact of DOMA Section 3  No immediate impact; no states recognized same-sex marriages in 1996  Impact began in 2004  Same-sex marriage recognized in Massachusetts in 2004  At present, same-sex marriage lawful/allowed in 17 states (and the District of Columbia)  Legal impact: Same-sex couples who were legally married under state law were considered single in more than 1,000 federal laws that define “marriage” or “spouse” 4

U.S. v. Windsor, 133 S. Ct (2013)  Addressed the constitutionality of Section 3 of DOMA  The Court in a 5-4 decision held that Section 3 of DOMA violated the due process clause of the Fifth Amendment “In determining whether a law is motivated by improper animus or purpose, discriminations of an unusual character especially require careful consideration. DOMA cannot survive under these principles." 5

U.S. v Windsor  The Court held that the burden DOMA imposed on legal married same-sex couples was unconstitutional: “DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the State has found it proper to acknowledge and protect. By this dynamic DOMA undermines both the public and private significance of state sanctioned same-sex marriages; for it tells those couples, and all the world, that their otherwise valid marriages are unworthy of federal recognition. This places same-sex couples in an unstable position of being in a second-tier marriage.” 6

Impact of Windsor  Section 1: Title  Section 2: Full Faith and Credit One state does not have to recognize same-sex marriage of other states  Section 3: Definition of “Marriage” “In determining the meaning of any Act of Congress, or of any ruling, regulation or interpretation of the various administrative bureaus or agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.” 7 |

Impact of Windsor  Legally married same-sex couples who live in states that recognize their marriage are eligible for more than 1,000 federal benefits that flow to married couples 8  Legally married same-sex couples who live in states that do not recognize their marriage may be eligible for federal benefits that flow to married couples

What Windsor Does Not Do  Extend federal recognition to same-sex couples with civil unions or domestic partnerships  Require states to legalize same-sex marriages  Require states to recognize same-sex marriages legally performed in other jurisdictions  Require health plans to cover same-sex spouses 9

States that Recognize Same-Sex Marriage in the U.S.* 10 * Map shows U.S. as of April 16, Pending lawsuits are also noted.

11 Windsor’s Impact on Employee Benefit Plans  Windsor: Participant with a same-sex spouse, who resides in a state that recognizes marriages between same-sex spouses, must be treated as married for purposes of federal law  IRS Rev. Rul : Takes Windsor a step further  Effective September 16, 2013, all lawful same-sex marriages (including those performed in foreign jurisdictions) are recognized for federal tax purposes, even if the participant lives in a state that does not recognize same-sex marriage  DOL Technical Release No : Agrees with IRS position in Rev. Rul for benefit plan purposes  IRS Notice : Additional IRS guidance on pre-tax elections under Section 125 cafeteria plans, flexible spending accounts (FSAs) and health savings accounts (HSAs)  IRS Notice : Pension and 401(k) plans not required to recognize same-sex spouses during periods before June 26, 2013 to maintain tax-qualified status

12 Windsor’s Impact on Qualified Plans

 IRS tax qualification rules require retirement plans to apply the Windsor decision to employees with same-sex spouses beginning on June 26, 2013  If a plan’s governing documents define “spouse” by reference to DOMA, or the plan’s terms are otherwise inconsistent with the Windsor decision, plan amendments are required  If amendment is required, it generally must be adopted by December 31, 2014 (although later deadlines may apply depending on the applicable IRS remedial amendment period)  If a plan does not wish to recognize same-sex spouses before June 26, 2013, the IRS will not seek penalties or disqualification on that basis  IRS guidance does not preclude a same-sex spouse’s claim for a benefit with respect to a participant who died before June 26,

14 Windsor’s Impact on Qualified Plans  Spousal Consent to Form of Payment and Beneficiary  Defined benefit pension plans must provide Qualified Joint & Survivor Annuity (QJSA) with same-sex spouse as the beneficiary, unless the participant elects another payment form and the same-sex spouse consents  Defined contribution plans (including 401(k) plans) must pay death benefit to participant’s same-sex spouse unless same-sex spouse consents to different beneficiary Qualified Preretirement Survivor Annuity QPSA must be paid to the surviving same-sex spouse

15 Windsor’s Impact on Qualified Plans  Default Beneficiary Rules  Default beneficiary hierarchy is generally a plan design decision  Spouse or domestic partner usually is first default beneficiary  Potential for claims by multiple parties Example: Participant and same-sex partner live in Texas, travel to Massachusetts in 2004, get married, return to Texas. Participant and spouse split up in 2009 but do not divorce (Texas court refuses to grant divorce to married couple of the same sex.) Participant moves to California, designates children as beneficiaries (without consent of estranged spouse), and subsequently dies. Plan says Texas law governs to the extent not preempted by ERISA.  Eligible Rollover Distributions  Same-sex spouse can roll over an eligible rollover distribution to another eligible retirement plan or IRA (just as opposite-sex spouse can)

16 Windsor’s Impact on Qualified Plans  401(k) Plans: Hardship Distributions  Same-sex spouse must be treated as spouse  If plan was previously amended to allow for “designated beneficiary” hardship events, no longer necessary for a participant to designate same-sex spouse as primary beneficiary to take hardship distribution for spouse’s medical, tuition or funeral expenses  401(k) Plans: Participant Loans  Plans that require spousal consent for participant loans must now obtain consent of same-sex spouse

17 Windsor’s Impact on Qualified Plans  Qualified Domestic Relations Orders  Must recognize QDRO dividing benefits earned during a participant’s same-sex marriage  ERISA Disclosure Requirements  Must provide certain disclosures to the same-sex spouse

18 Windsor’s Impact on Welfare Plans

 Self-Funded Plans Before Windsor: Plan sponsors had almost unfettered authority to define who is eligible for coverage After Windsor: Plan sponsors are still free to define who is eligible  Currently, no requirement to offer coverage to same-sex spouses, even if coverage is available to opposite-sex spouses  If a same-sex spouse is covered, that coverage will now extend to other benefits, such as COBRA and Health Reimbursement Accounts But, there may be some risk associated with covering only opposite-sex spouses No requirement to cover domestic partners or civil union partners  Insured Plans Coverage of same-sex spouses depends on insurance laws in state where insurance policy is issued 19

20 Windsor’s Impact on Welfare Plans  Paying for Coverage on a Pre-Tax Basis  Before Windsor: Employees paid premiums for same-sex spouse’s group health plan coverage on a post-tax basis  After Windsor: Employees may pay premiums for same-sex spouse’s group health plan coverage through pre-tax payroll deductions  Income Tax Effects of Group Health Plan Coverage  Before Windsor: Employers were required to impute income to the participant for cost of same-sex spouse’s coverage  After Windsor: Employers should stop imputing income for federal tax purposes due to coverage of same-sex spouse  IRS Notice : Employee may exclude the cost of spousal coverage from tax return and pursue refund for open tax years

21 Windsor’s Impact on Welfare Plans  Payroll Tax Effects of Group Health Plan Coverage  Beginning September 16, 2013, employer should not withhold or pay federal payroll taxes based on imputed income for an employee who has a lawful same-sex spouse  IRS Notice : Employer can file for refund of employer portion of federal payroll taxes (and employee portion if employee’s whereabouts are known) o Could have filed Form 941 during Q to request refund for payroll taxes attributable to Q1 through Q o If Form 941 was not filed during 2013, may file Form 941-X for Q to request refund for payroll taxes attributable to Q1 through Q o May also file Form 941-X for Q4 2012, 2011 and 2010 to request refund for payroll taxes attributable to those years

Windsor’s Impact on Welfare Plans  Mid-Year Enrollment  If a group health plan has spousal coverage, the employer can permit a mid-year election to enroll new same-sex spouses and their dependent children  Transition rules for plan year including December 16, 2013 permit a mid-year election to enroll existing same-sex spouses who were previously not enrolled in the plan and their dependent children Election changes are effective within a reasonable period of time after December 16, 2013 Participant can choose whether to pay for same-sex spousal coverage pre-tax or after-tax Revised Form W-4 is acceptable substantiation 22

23 Windsor’s Impact on Welfare Plans  Health Flexible Spending Accounts, Health Savings Accounts, and Health Reimbursement Arrangements  May now reimburse medical expenses of same-sex spouse  HSAs: Annual contribution limit for married couples ($6,550 for 2014) applies for same-sex couples  Dependent Care Assistance Programs  May now reimburse dependent care expenses of: o Same-sex spouse’s children; or o Same-sex spouse who is incapable of caring for self  Same-sex couples treated the same as opposite-sex couples o $5,000 annual contribution limit if filing jointly o $2,500 per person annual contribution limit if filing jointly

24 Windsor’s Impact on Welfare Plans  COBRA Continuation Coverage  If same-sex spouse is covered under plan, he/she is now entitled to the same COBRA continuation coverage rights as any other COBRA qualifying beneficiary  HIPAA Special Enrollment  Employee can enroll same-sex spouse mid-year and make mid-year changes (e.g., HMO plan to a PPO)  Affordable Care Act: Employer Shared Responsibility (“Pay or Play”)  Beginning January 1, 2015 (2016 for employers with employees), must offer group health plan coverage to children of same-sex spouse (now considered “stepchildren” of the employee) to avoid potential penalties

Employer Action Steps 1.Review benefit plan definitions of “spouse” and update as necessary 2.Apply new definitions of “spouse” on a prospective basis 3.Update employee handbook, summary plan descriptions and enrollment materials 25 4.Review and update beneficiary designation forms as needed 5.Communicate changes to HR staff 6.Consider filing for FICA refund (all open tax years)

Employee Action Steps 1.Get hitched 2.Get divorced 3.Notify employer of same-sex spouse 4.Change/update beneficiary designations 5.Consider filing for tax refund (all open tax years) 26

Future IRS or DOL Guidance Forthcoming? 27

Tough Questions Can a welfare plan exclude coverage for same-sex spouses? 28 Should welfare plans exclude coverage for domestic partners? Only in states where same-sex marriage is recognized? Can a same-sex spouse sue under ERISA for death benefits paid out to a non-spouse beneficiary prior to September 16, 2013 (effective date of IRS guidance)?