1. The Demise of DOMA: What’s Next? Employee Benefits Issues Post-Windsor July 15, 2014 James A. Deets Compensation & Benefits Solutions, LLC 2633 McKinney Avenue, Suite 130-517 Dallas, TX (214)-683-6918 1

2. Background Congress passed the Defense of Marriage Act (DOMA) in 1996 – Section 3 of DOMA defined the word “marriage” as a legal union between one man and one woman as husband and wife “spouse” was defined as person of the opposite sex who is a husband or a wife In response, the Internal Revenue Service (“IRS”) announced that it would not recognize same-sex marriages as marriages for federal tax purposes 2

3. United States v. Windsor 133 S. Ct. 2675 (2013) Background – Windsor involved a couple – Edith Windsor and Thea Spyer – who registered as domestic partners in 1993 in New York, then legally married in Canada in 2007 The couple lived in New York City until Thea Spyer passed in 2009. At that time New York recognized same-sex marriages entered into under the laws of other jurisdictions – DOMA barred Windsor from qualifying for the marital exemption from the federal estate tax due upon Spyer’s death Windsor paid $363,053 in estate taxes, then sought a refund from the IRS arguing that section 3 of DOMA violated her constitutional right to equal protection under the law, as applied to the federal government through the 5 th Amendment 3

4. United States v. Windsor 133 S. Ct. 2675 (2013) Supreme Court Opinion – On June 26, 2013, the Supreme Court agreed with the lower courts and held that section 3 of DOMA was unconstitutional – “DOMA’s principal effect is to identify a subset of state- sanctioned marriages and make them unequal. The principal purpose is to impose inequality, not for other reasons like governmental efficiency” 4

5. IRS Guidance On August 29, 2013, the IRS issued Revenue Ruling 2013-17 and two sets of Frequently Asked Questions addressing a number of tax law implications of the Windsor decision IRS Notice 2014-19 further cleared up many open issues relating to qualified retirement plans 5

6. Revenue Ruling 2013-17 The IRS focused the legal analysis on its position on common law marriages first articulated in Revenue Ruling 58-66 Look to state of celebration Emphasized the need for a uniform nationwide rule for efficient and fair tax administration 6

7. “Spouse” Includes Lawful Same-Sex Marriages The IRS indicated that the use of terms “husband” and “wife” are to be considered interchangeably and without gender connotation The term “spouse” now includes an individual married to a person of the same sex if the individuals are lawfully married under state law State law includes any domestic or foreign jurisdiction having the legal authority to sanction marriage The term “marriage” includes a same-sex marriage 7

8. “Place of Celebration” Controls the Definition of “Spouse” Same-sex couple’s marital status is to be determined based upon the law of the state in which the marriage ceremony was performed – This is true even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages 8

9. Common Law Marriage Employers need to be aware of same-sex couples that have been married under common law 3 U.S. jurisdictions permit both same-sex marriage and common law marriage – District of Columbia – New Hampshire – Rhode Island 9

10. No Impact on Domestic Partnerships The Ruling confirms that the term “spouse” (and husband/wife or marriage) does not include individuals (whether same or opposite sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as marriage under the laws of the state 10

11. Implications The Supreme Court’s decision to strike down section 3 of DOMA will have a significant impact on the Employee Benefits area of tax law – Rev. Rul. 2013-17 did not provide a great deal of guidance for employers or employees – Left many open issues – Notice 2014-19 cleared up most remaining issues with respect to qualified retirement plans 11

12. Impact on Retirement Plans Rev. Rul. 2013-17 explains that qualified retirement plans must treat legally married same-sex spouses as married – Qualified plans must recognize a same-sex marriage that was entered into in a jurisdiction whose laws authorize the marriage The IRS began applying this standard on September 16, 2013 – Note that taxpayers can rely on Rev. Rul. 2013-17 retroactively for amended or adjusted refunds or claims for overpayments 12

13. Impact on Retirement Plans Hardship distributions from section 401(k) Plans Permitted if an employee has an immediate and heavy financial need with respect to employee’s spouse or “designated beneficiary” – Designated Beneficiary – would pick up a domestic partner if proper designation was made Based on the new guidance from the IRS and the Department of Labor (“DOL”), plans must allow hardship distributions to same-sex spouses even if the designation was not made 13

14. Qualified Retirement Plans Revenue Ruling 2013-17 will require qualified retirement plans to: – Provide a joint and survivor annuity and/or a qualified optional survivor annuity to all participants in same-sex marriages – Recognize a same-sex spouse for purposes of the required minimum distribution rules – Permit same-sex surviving spouses to elect a direct rollover to an eligible retirement plan or IRA 14

15. Qualified Retirement Plans Qualified Retirement Plans must: – Provide a qualified preretirement survivor annuity to a married participant’s same-sex surviving spouse – Require consent of a participant’s same-sex spouse to the participant’s election of an optional form of benefit – Require the consent of a participant’s same-sex spouse to the participant’s designation of a non-spouse beneficiary – Recognize a same-sex spouse as a spouse for purposes of safe- harbor hardship distribution rules 15

16. Effective Dates Notice 2014-19 clarified open issues regarding effective dates – Qualified plans must be operated consistent with Windsor retroactively to June 26, 2013 “State of Celebration” doctrine need not be followed until September 26, 2013 – Plans may be operated consistent with Windsor prior to June 26, 2013, but additional plan amendments would most likely be required 16

17. Plan Amendments Deadline for amending qualified plans is December 31, 2014 Whether required depends on the terms of the Plan – If the Plan’s definition of “spouse” would include legally married same-sex couples, then generally no amendment is necessary – If “spouse” would exclude same-sex spouses, or if the Plan will be operated consistent with Windsor prior to June 26, 2013, then a plan amendment will be required 17

18. Impact on Health, Welfare and Fringe Benefit Plans Revenue Ruling 2013-17 can be relied on retroactively for refunds/credits to cover overpayments of employment tax with respect to employer provided health benefits or fringe benefits including: Section 106 – health care coverage (including dental and vision ) – The value of the spousal coverage is no longer taxable income Section 117(d) – qualified tuition reduction Section 119 – meals and lodging for the convenience of the employer Section 129 – dependent care assistance – For expenses incurred for the care of a spouse who is incapable of caring for herself or himself Section 132 –fringe benefits 18

19. Cafeteria Plans Employer contributions to a cafeteria plan are usually made under a salary reduction agreement Employees elect to contribute a portion of their salary on a pre-tax basis to pay for qualified benefits – These contributions are not constructively received and are not considered wages for federal income tax purposes Employees may only change cafeteria plans elections mid-year and make new elections under certain circumstances and as permitted by the plan ₋Notice 2014-1 permitted a cafeteria plan to treat a participant who was married to a same-sex spouse as of June 26, 2013 as if they had experienced a change in marital status as of such date, and accept election changes 19

20. Cafeteria Plans Health Flexible Spending Accounts – A health flexible spending account (FSA) is a form of cafeteria plan benefit which reimburses employees for qualified medical expenses Post-Windsor, legally married same-sex couples are able to take advantage of FSAs to the same extent as legally married opposite-sex couples After-tax premium payments may be treated as pre-tax – Individuals who paid for same-sex spousal coverage with after-tax dollars under a section 125 cafeteria plan may also retroactively treat those payments as having been made on a pre-tax basis Under Notice 2014-1, health FSA arrangements may reimburse covered expenses incurred which were incurred by the participant’s same-sex spouse which were incurred from: The start of the plan year that includes June 26, 2013, or The date of the marriage, if later 20

21. Cafeteria Plans Health Savings Accounts – A Health Savings Account (HSA) is a vehicle that eligible taxpayers can use to pay qualified medical expenses, including those incurred by the employee’s spouse Notice 2014-1, clarified that legally married same-sex couples can take advantage of HSAs to the same extent as opposite-sex couples The maximum annual deductible contribution to HSAs is $6,550 for the 2014 taxable year This limit applies to same-sex married couples who are treated as married for federal tax purposes. 21

22. COBRA For COBRA rights to apply, the individual losing coverage due to a qualifying event must be a “qualified beneficiary” – Qualified Beneficiary – Under COBRA, includes the employee, spouse, or a “qualified dependent child” Under the Service’s new guidance, employers are required to recognize all spouses equally – Employers should consider modifying their COBRA administrative provisions to ensure they are recognizing all spouses with notice and election rights Further guidance is needed to deal with periods prior to September 16, 2013 22

23. Guidance From Other Federal Agencies Department of Labor The DOL has issued contradictory guidance on how it will determine the validity of a same-sex marriage – ERISA - In Technical Release 2013-04, the Secretary of Labor announced that it would follow the Service’s lead and adopt the place of celebration method with respect to its interpretation of the Internal Revenue Code and the Employee Retirement Security Act (ERISA) DOL plans to issue further guidance – FMLA -The DOL issued a fact sheet in August 2013 that defines “spouse” as a husband or wife recognized in the state where the employee resides, rather than as recognized in the state where the celebration was performed This definition is limited for the purposes of the Family and Medical Leave Act 23

24. Guidance From Other Federal Agencies Civilian Employees – Office of Personnel Management is recognizing same-sex marriages based on the place of celebration – Benefits coverage is now available to a federal employee’s or annuitant’s same- sex spouse and to the children of the same-sex marriage Health, life, vision, dental, long-term care insurance, and FSAs – No change in guidance for civil unions or domestic partnerships Still not recognized as a marriage 24

25. Guidance From Other Federal Agencies Social Security Administration – The Social Security Administration will approve the payment of claims involving same-sex marriage if the couple is living in a state that recognizes marriage Effective August 9, 2013 Note that this is different from the Service’s position Medicare – Health and Human Services (HHS) is requiring that all beneficiaries in Medicare Advantage plans must have access to equal coverage provided by a nursing home where the spouse lives HHS is applying the state of celebration doctrine 25

26. Guidance From Other Federal Agencies Department of Homeland Security – Will generally recognize a same-sex marriage based on place of celebration – U.S. citizen can sponsor a same-sex spouse who is a foreign national for a family- based immigrant visa Active Military – Department of Defense plans to extend spousal and family benefits to legally- married same-sex spouses of uniformed service members Health care, housing allowances, and family separation allowances will be provided retroactively to June 26, 2013 (the date of the Windsor decision) – The Pentagon will also grant “non-chargeable marriage leave” to allow same-sex couples to travel to a jurisdiction that allows same-sex marriages 26

27. Questions for Consideration Among the questions which were recently answered by Notice 2014-19: Survivor Annuity Rights – What survivor annuity rights must be provided to the same-sex spouse of a retired employee who commenced pension benefits prior to September 16, 2013? – What, if any, preretirement survivor annuity benefits must be provided to a surviving same- sex spouse where the employee spouse died prior to September 16, 2013? Inherited Accounts – What, if any, recourse does the same-sex spouse of a deceased former employee (died in 2012) have in the event that the account was inherited by the deceased participant’s children, rather than the same-sex spouse? – What, if any, exposure to liability might a plan or sponsor have under the above circumstances? 27

28. Unanswered Questions Church Plans – These plans are exempt from ERISA – Presumably these plans that have been structured to fall within the scope of sections 401(a), 403(b) or 457 will be required to extend any spousal protections to same-sex spouses. The Service’s position does not indicate whether it compels church plans to make same-sex spousal rights or coverage available in the absence of an applicable state law mandate. State Government Plans – How will plans maintained by state governments be impacted by the positions outlined in Revenue Ruling 2013-17? The Supreme Court did not address or strike down Section 2 of DOMA, which provides that no state shall be required to recognize a same-sex marriage performed in another state 28

29. What Now? Many employers have been hesitant to move forward with benefit plan design and administrative design to reflect Windsor until guidance has been issued With the issuance of Rev. Rul. 2013-17,the companion FAQs, Notice 2014-1, Notice 2014-19 and DOL Technical Release 2013-4, now is the time to take action There are a number of steps that all employers should begin to take, if they haven’t already 29

30. Communication Comprehensive communication to all employees – Can be done in connection with a special mid-year benefits enrollment period for same-sex spouses and their dependents Send special communications to employees already enrolled in domestic partner coverage under group insurance plans SPDs and open enrollment guides, which will need to be updated to reflect the post-Windsor landscape, present an opportunity to communicate with employees in a less immediate timeframe 30

31. Immediate Course of Action Review Employee Records – It is important to retain documentation of all marriages, including same-sex marriages, pending future guidance – Develop a process to collect records of all marriages Be careful of discriminatory practices You cannot collect records from same-sex spouses without also collecting records from opposite-sex spouses 31

32. Immediate Course of Action Retirement Plans Treat all same-sex spouses as “spouses” for plan purposes, beginning June 26, 2013 – This is important for beneficiary designations and paying plan benefits Consider sending a participant communication to notify participants of Windsor and the IRS guidance – Recommend that all participants update participant records e.g., update their beneficiary designation forms – Participants should be asked to indicate marital status on distribution forms and provide spousal consent, when required 32

33. Immediate Course of Action Retirement Plans Review qualified plan administrative procedures and policies – Be prepared to implement spousal rights for same-sex spouses prospectively as of June 26, 2013 Spousal consent to the designation of alternative death beneficiaries Spousal joint and survivor annuity rights under defined benefit plans Spousal rollover rights Minimum required distribution calculations for surviving spouse benefits under retirement plans 33

34. Immediate Course of Action Health, Welfare and Fringe Benefit Plans Update enrollment materials and plan entry paperwork to reflect the new rules and options available to same-sex spouse in light of Windsor Permit reimbursement of qualifying medical expenses of an employee’s same-sex spouse (and spouse’s children) from Health FSAs and HRAs 34

35. Immediate Course of Action If health benefits are provided to spouses, clarify that COBRA continuation of coverage and HIPAA special enrollment requirements apply to same-sex spouses in the same manner as any other spouse Permit reimbursement of qualifying dependent care assistance expenses for an employee’s eligible disabled same-sex spouse or the same-sex spouse’s child under a DCAP 35

36. Immediate Course of Action Determine whether spousal life insurance or beneficiary designations need to be updated to reflect that “spouse” includes a same-sex spouse If health and welfare benefits are funded through a Voluntary Employee Beneficiary Association (VEBA), determine whether trust documents need to be amended to reflect that “spouse” includes same-sex spouse 36

37. Immediate Course of Action Stop imputing income for the imputed value of health benefit coverage currently being provided to same-sex spouses (e.g. via a domestic partnership designation) no later than September 16, 2013 – Employers need to implement changes to eliminate imputed federal taxable income for same-sex couples’ benefits for their employees who were married in states which recognize the validity of same-sex marriages – For state income tax purposes, employers will still need to assess on a state-by-state basis whether the value of any such coverage must be imputed in state taxable income 37

38. Employment Taxes Employers – Employers should have already stopped imputing income to employees for employer-paid plan coverage for same-sex spouses – Employers may recoup overpayment of FICA and Medicare Tax Employers may claim a refund of, or make an adjustment for, any excess Social Security and Medicare taxes paid on the benefits to a legally married same-sex partner if the limitation period is open Notice 2013-61 provides alternative administrative procedures for reporting income and FICA tax adjustments in response to Windsor 38

39. Immediate Course of Action Review desirability of filing for a refund on FICA/Medicare Tax overpayments – Employers who have made same-sex spousal medical coverage available in the past should assess the economic benefit of filing for refunds on the employer portion of FICA and Medicare tax payments on the imputed value of that coverage Filing is optional – Notice 2013-61 provides administrative procedures 39

40. Notice 2013-61 Procedures for Correcting 2013 Returns – Employers were permitted to adjust for and reduce the wages and over-withheld taxes paid for the first three quarters of 2013 on its 4 th quarter Form 941 Employer must repay or reimburse its employees for the over collected FICA and income taxes before 12/31/2013 – If employer did not repay over-collected FICA and income taxes on or before 12/31/2013, they can file one Form 941-X By utilizing this special alternative procedure, an employer can avoid having to file a separate Form 941-X for each calendar quarter in 2013 40

41. Immediate Course of Action Self-Insured Plans Employers with self-insured welfare plans may not have to extend spousal-benefit coverage to same-sex spouses – Federal law does not require spousal welfare-benefit coverage State insurance law mandates do not apply to self-insured plans – Employers that continue to provide benefit coverage only to opposite- sex spouses, however, are likely to face legal challenges under federal discrimination law Title VII of the federal Civil Rights Act does not currently prohibit discrimination based on sexual orientation A Federal District court held on May 1, 2014 that ERISA would not require same-sex spousal coverage (Roe v. Empire Blue Cross Blue Shield, S.D.N.Y.) 41

42. Immediate Course of Action Review medical plan documents and insurance policies for definitions of key terms – Assess whether plan document or policy contract amendments are necessary Language which defines an employee’s “spouse” with reference to federal tax laws will need to be revisited if a plan’s current design is to be maintained 42

43. Domestic Partners Non-Married Same-Sex Couples The new agency guidance does not impact the treatment of non-married same-sex couples – For Federal tax purposes the term marriage does not include registered domestic partnerships or civil unions – Where the DOL has authority to interpret ERISA and the IRC, they will not recognize domestic partnerships or civil unions as marriages The workarounds previously employed will have to suffice for the time being 43

44. Domestic Partnerships & Civil Unions Dependent Status – Under Code section 152, a domestic partner may be a dependent if he or she is a “qualifying relative” Must have the same principal place of abode as the employee, and be a member of the employee’s household Must have gross income less than a specified amount – This requirement does not apply to health coverage under Code sections 105 and 106 Must receive over half of his or her support from the employee; and Cannot be anyone else’s qualifying child 44

45. Domestic Partnerships & Civil Unions Qualified Dependent – Employer-provided health coverage will be tax-free to the domestic partner, and the benefits received will also be tax-free, under Code sections 105 and 106 – The employee may pay for the coverage on a pre-tax basis – The employer may rely on the employee’s certification, an affidavit or a prior year’s tax return to substantiate dependent status (PLR 200339001 (2003). PLR 200108010 (2000)) 45

46. Domestic Partnerships & Civil Unions Non-qualifying Dependent – If the domestic partner does NOT qualify as the employee’s dependent under Code section 152, then The value of coverage provided by the employer to the domestic partner will be taxable to the employee as income and reportable on the employee’s W-2 – Benefits paid are non-taxable under Code section 104 The employee may NOT pay for the domestic partner’s coverage with pre- tax dollars 46

47. Conclusion At this point, it is not clear how far-reaching the impact of the Windsor opinion will be for the practice of employee benefit administration With time, the IRS should continue to provide guidance – Until then, employers should take the steps mentioned above to remain compliant 47

48. Questions? James A. Deets, J.D. Compensation & Benefit Solutions LLC jamesdeets@compandbensolutions.com (214) 683-6918 48

49. James Deets Director Compensation & Benefit Solutions, LLC (214) 683 – 6918 jamesdeets@compandbensolutions.com Mr. Deets has over 15 years of experience in the employee benefits and executive compensation area. His expertise includes qualified plans (including nondiscrimination and other qualification issues, compliance and correction of plan defects); health and welfare plans (including PPACA, FMLA, HIPAA and COBRA issues, cafeteria plans, retiree welfare benefits, VEBA trusts, severance plans and multiemployer welfare plans); executive compensation plans, nonqualified plans and stock plans (including deferred compensation and supplemental executive retirement plans and associated funding, securities and taxation issues, “golden parachute” and Section 162(m) issues); employee stock purchase plans; performance bonus and incentive plans; split dollar life insurance plans; and top-hat plans. Mr. Deets also has considerable experience in dealing with the benefits and executive compensation aspects of mergers and acquisitions, including the applicability and impact of the golden parachute rules. He also has garnered considerable experience in ERISA litigation matters involving benefit claims, fiduciary breaches, subrogation/reimbursement and preemption issues, and has served as a consulting expert with respect to employee benefits issues in the context of bankruptcy proceedings. James received his law degree with honors from the Baylor University Law School in 1993, where he was Assistant Managing Editor of the Baylor Law Review. He received a B.S. in Mathematical Sciences from Baylor University in 1990, summa cum laude, and is a member of Phi Beta Kappa. Mr. Deets is a member of the State Bar of Texas. Prior to joining Compensation & Benefit Solutions, LLC, Mr. Deets was Counsel in the Dallas office of Hunton & Williams LLP, where he focused his practice in the employee benefits and executive compensation area. James was born and raised in the Dallas/Fort Worth area and with the exception of 7 years in Waco to attend Baylor, has lived in the area his entire life. When he is not working, James enjoys traveling, cooking, watching movies or sampling a fine wine. Most recently, James has developed a habit of building, flying, crashing and repairing radio controlled helicopters, and was recently reported to have been spotted at a local park putting some of his birds through loops and rolls. 49