Same-Sex Spouse Has Right to Pension Benefits Under ERISA - First Case Following Windsor Decision and its Implications for Benefit Plans
On July 29, 2013, the United States District Court for the Eastern District of Pennsylvania ruled in Cozen O'Connor v. Tobits that a tax-qualified pension plan must provide ERISA-mandated benefits to a same-sex spouse, if the same-sex couple resides in a state that recognizes their marriage as valid. This is the first federal court decision relating to employer-sponsored retirement plans following the United States Supreme Court's historical ruling in United States v. Windsor that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional under the Fifth Amendment of the United States Constitution. As anticipated, it appears the Windsor decision will have significant implications for employer-sponsored plans. The Tobits decision provides some preliminary guidance for employers as they try to determine how the Windsor decision should be implemented.
Employers and plans have been considering whether they should recognize same-sex marriages based on the law of the state where the marriage was formally performed, or the law of the state where the married couple resides (if different). In Tobits, the court looked to the law of the state where the couple resided in determining that they were legally married. While this provides some support for plans that wish to make determinations based on a couple's domicile, it is only binding law in the Eastern District of Pennsylvania and therefore most plans are not bound to follow this ruling. As discussed below, the decision indicates the difficult questions plans will face as they attempt to determine how to treat same-sex married couples in accordance with ERISA and the Code.
Sarah Farley was an employee of the law firm of Cozen O'Connor and a participant in the Cozen O'Connor Profit Sharing Plan, a tax-qualified pension plan governed by ERISA. In 2006, Ms. Farley legally married Jean Tobits in Canada. After their marriage, Ms. Farley and Ms. Tobits resided in Illinois.
In 2010, Ms. Farley died. Under the Cozen O'Connor Plan terms (in accordance with ERISA and the Code), if a plan participant was married at the time of her death, the Plan was required to provide her surviving spouse with a qualified pre-retirement survivor annuity (QPSA). Ms. Tobits requested payment of the QPSA from the Cozen O'Connor Plan as Ms. Farley's surviving spouse. Ms. Farley's parents made a competing claim for the survivor benefits under the plan terms. They claimed that Ms. Farley had named them as her beneficiaries, which would have entitled them to any survivor benefits under the Plan-- but only if Ms. Farley was unmarried at the time of her death.
The Court reviewed the plan terms, noting that they required death benefits to go to the participant's "surviving Spouse," absent a spousal waiver, in accordance with federal law. The term "Spouse" was not defined under the Plan and as a result, the Court turned to ERISA and the Code to make a determination of whether Ms. Tobits was a "Spouse." Next, the Court reviewed the Windsor decision and observed that when Section 3 of DOMA was considered good law, qualified plans had no obligation to provide legally mandated benefits to same-sex spouses. However, "following the [Supreme] Court's ruling [in Windsor], the term 'Spouse' is no longer unconstitutionally restricted to members of the opposite sex, but now rightfully includes those same-sex spouses in 'otherwise valid marriages.'" (In the Windsor decision, Justice Kennedy stated that DOMA undermined the public and private significance of state- sanctioned same-sex marriages by signifying that these "otherwise valid marriages are unworthy of federal recognition.")
The Court found that "there can be no doubt" that Ms. Tobits is Ms. Farley's surviving "Spouse" under the Plan following Windsor. Significantly, the Court stated:
Post-Windsor, where a state recognizes a party as a "Surviving Spouse," the federal government must do the same with respect to ERISA benefits—at least pursuant to the express language of the ERISA-qualified Plan at issue here. There can be no doubt that Illinois, the couple's place of domicile, would consider Ms. Tobits Ms. Farley's "surviving Spouse"—indeed it already has made that specific finding under state law. Windsor makes clear that where a state has recognized a marriage as valid, the United States Constitution requires that the federal laws and regulations of this country acknowledge that marriage.
In light of this, the Court concluded that Ms. Tobits was Ms. Farley's "Spouse" under the Plan and awarded her the QPSA benefit.
Prior to the Court's decision in Windsor, DOMA effectively provided for a single, uniform definition of "spouse" under federal law– that being an opposite-sex spouse. This enabled employers and plan sponsors to be able to determine with near certainty the individuals to whom they were required to provide certain rights or benefits under an ERISA plan, which had the effect of simplifying plan administration. For those employers that seek to provide parity in benefits, the Court's holding in Windsor was welcome news because it has the effect of ensuring that at least some same-sex spouses are eligible for the exact same benefits and rights available to employees with opposite-sex spouses. However, it also created additional administrative complexity as plans and employers try to determine whether an employee with a same-sex spouse is eligible for certain benefits under federal law, or how those benefits should be treated for federal tax purposes. Most plans have taken a wait-and-see approach in the hope that guidance will be forthcoming from federal agencies (in particular, the Departments of Treasury and Labor and the Internal Revenue Service) or the courts. The Tobits decision is the first federal court decision that provides some limited guidance, although it also leaves many questions unanswered.
The prevailing thinking has been that the agencies and courts might settle on a rule that would allow employers and plans to define "spouse" as a person with whom a participant has entered into a marriage in a state or foreign country where the marriage was considered valid under that state or foreign country's law at the time it occurred, and such marriage has not subsequently been legally dissolved. Such an approach is often referred to as determining marriage based on the "state of celebration." An alternative possibility was the application of a so-called "domicile" rule. Under this alternative, a "spouse" would be defined as a person with whom a participant has entered into a marriage that is legally recognized under the laws of the state in which that couple presently resides.
In Tobits, the Eastern District of Pennsylvania appears to have endorsed a "domicile" rule, as it focused entirely on the law relating to same-sex marriage in Illinois, where the couple lived. Therefore, if a plan were to follow Tobits when determining if an individual is entitled to spousal survivor benefits, it should be analyzing whether the individual was considered to be legally married to the participant at the time of the participant's death, under the laws of the state where the couple resided.
What is particularly interesting about the Court's analysis is the fact that Illinois does not issue marriage licenses to same-sex couples. Arguably, then, the Court could have concluded that Illinois does not recognize "same-sex marriage" under its laws. However, Illinois does have a civil union statute. The court opined that because Illinois recognizes civil unions, it effectively recognizes same-sex marriages performed in other jurisdictions (such as Canada). The analysis under Tobits appears to not be whether the couple lives in a state that allows same-sex couples to be married, but rather, whether the couple lives in a state that effectively recognizes same-sex marriages performed in other jurisdictions.
Currently, 13 states (California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington) and the District of Columbia issue marriage licenses to same-sex couples. It seems clear that a same-sex couple that was validly married and that lives in one of these states would be considered legally married under ERISA based on the rationale of Tobits. For same-sex couples living in other states, further analysis would have to be performed to determine if the state recognizes same-sex marriage in other jurisdictions. We note that (not including the states named earlier) an additional four states (Colorado, Hawaii, Illinois, and New Jersey) provide for civil unions, and three states (Nevada, Oregon, and Wisconsin) provide for domestic partnership. While it by no means follows that married same-sex couples living in these seven states would be considered legally married under ERISA based on Tobits, it certainly would require some consideration. The Court did not specifically address how it would have ruled if Ms. Farley and Ms. Tobits had lived in a state that does not recognize same-sex marriage or civil unions, or has a constitutional ban against legal recognition of same-sex relationships. However, it would seem that same-sex couples living in such states would have a difficult time arguing that Tobits supports their right to spousal benefits under ERISA.
It is worth emphasizing, however, that the conclusion reached in Tobits is only binding in the Eastern District of Pennsylvania. It is far from certain whether other courts will similarly reach the conclusion that a marriage in one jurisdiction, that is considered a civil union in another jurisdiction, constitutes a marriage under federal law. This is important because if the court found that Ms. Farley and Ms. Tobits were in a civil union under Illinois law, but not a marriage under Illinois law, presumably Ms. Tobits could not have been eligible for QPSA rights (since survivor rights under ERISA do not apply to civil unions).
Finally, another unusual fact underlying Tobits is that Illinois' civil union law was signed into law in January 2011 and became effective in June 2011—after Ms. Farley's death in September 2010. Therefore, at the time Ms. Farley died she was not in a civil union with Ms. Tobits under Illinois law, although in October 2011, a probate court in Illinois found Ms. Tobits a party to a civil union with Ms. Farley and declared her Ms. Farley's sole heir. This adds another level of complexity. While some would argue that a plan should base its determination of marital status on the law at the time of the participant's death (since that is when the survivor benefits would become payable), Tobits suggests that if the state law changes after the participant's death, the plan may have to take that into account as well.
The Supreme Court's decision in Windsor was good news for same-sex married couples, and, in the long run, is an important step forward in giving employers the ability to treat all married couples identically under their health and welfare and retirement plans. In the short term, however, employers will face challenges as they attempt to determine what changes are needed in reaction to the decision, and the complicated issues raised by Tobits highlight those challenges. Future guidance from the IRS and DOL will hopefully provide some direction regarding the steps that need to be taken, but employers should begin the process of considering what changes to their plan documents and administrative practices will be needed.
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