Tag Archives: supreme court

The Implications Of Universal Same-Sex Marriage For Employee Benefit Plans

same-sex marriage

The recent landmark decision of Obergefell v. Hodges held that state laws banning same-sex marriages are unconstitutional. The Obergefell decision extends the Court’s prior 2013 decision in United States v. Windsor  which held unconstitutional the section of the Defense of Marriage Act prohibiting the federal government from recognizing state laws that allow same-sex marriage. Obergefell moves beyond Windsor and prohibits the states from banning same-sex marriage. This Client Alert discusses the implications of Obergefell in the context of employee benefit plans.

Qualified Retirement Plans

The recent Supreme Court decision is not expected to significantly change the terms of qualified retirement plans. The Supreme Court ruled in Windsor  that federal law recognizes any marriage that is valid under state law. Consequently, the IRS required plans to include legally married same-sex spouses within the meaning of “spouse” for retirement plan purposes. The IRS and Department of Labor provided guidance to the effect that a valid same-sex marriage in one state must be recognized in any state for benefit plan purposes. The Supreme Court has now ruled that same-sex marriage must be permitted in every state. Thus, retirement plans will continue to recognize all legal marriages; the difference is that all states must permit same-sex marriages. Plan sponsors should review their plans to ensure the definition of “spouse,” or any other provisions, are consistent with the Obergefell decision.

Self-Insured Health and Welfare Plans

Private sector self-insured health and welfare plans are subject to the federal mandates of ERISA and generally not state laws that affect employee benefits. Neither ERISA nor the recent Obergefell decision directly require self-insured plans to cover same-sex spouses. However, in light of the equal protection rights afforded to same-sex married couples under Obergefell, a self-insured plan that covers opposite-sex married couples and not same-sex married couples may be contrary to federal law. In light of the Obergefell case, such plans should be carefully reviewed.

Insured Health and Welfare Plans

Unlike non-governmental self-insured health and welfare plans, insured health and welfare plans are subject to state insurance law. As a result, it seems clear that where a plan covers a participant’s spouse, such coverage shall extend to same-sex spouses in all states.

Domestic Partners Revisited

The trend in the employee benefits community over the past several years has been to recognize relationships regardless of sexual orientation. Many plans, in advance of legal dictates, voluntarily allowed coverage of same-sex partners through domestic partner provisions and policies. The provisions and policies often entail a process of representations on the part of the plan participant and verification procedures. In addition, because domestic partners are not legally married, plan sponsors must impute income to the participant for certain domestic partner benefits. Now that same-sex couples may marry in any state, domestic partner provisions and policies may no longer be desired or deemed necessary by plan sponsors. Simply put, due to the fact that same-sex couples may be legally married in any state, there may no longer be a need to recognize domestic partners.

Action Items

Plan sponsors should:

  • Review their qualified retirement plan provisions to ensure consistency with Obergefell.
  • Review and consider the terms of health and welfare plans; if the self-insured health and welfare plan excludes same-sex spouses, analyze and assess any potential compliance risk.
  • Contact your insurance carrier with respect to possible changes in your insurance policies.
  • Revisit your domestic partner provisions and policies.
  • Stay tuned for clarifying guidance with respect to open issues including whether Obergefell will be applied retroactively.
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Health Care Subsidies Upheld

Today, in King v. Burwell, the United States Supreme Court voted 6-3 to uphold the availability of subsidies provided by the Affordable Care Act (“ACA”) in federal Exchanges. This ruling means that, for most employers, the threat of ACA penalties is a reality.

The ACA requires most Americans to have health insurance coverage or pay a penalty, and the ACA provides subsidies for individuals within a certain income range in order to make health insurance more affordable. In addition, the ACA requires the creation of a health insurance marketplace, or “Exchange,” in each state in which people can compare and purchase health insurance. The Exchanges are the sole mechanism through which Americans can obtain health care subsidies. States were offered the opportunity to establish their own Exchange but states could also opt to have the federal government establish the Exchange on their behalf. Thirty-six states opted not to create a state-run Exchange and instead allowed the federal government to establish their Exchanges. Opponents to the ACA argued that the law only permitted ACA subsidies to participants in state Exchanges and were unavailable to participants in those states with federally run Exchanges.

In reaching its decision, the Court relied on the legislative intent behind the ACA in its interpretation of the statutory language. The phrase at issue declares that subsidies are available through “an Exchange established by the State.” The Court interpreted this phrase to include both state and federally-operated Exchanges. This interpretation is consistent with the regulations implementing the subsidies where the IRS defines “Exchange” as an Exchange established by the state or the federal government. As a result, this ruling permits individuals who purchase health coverage through a state or federally run Exchange to receive subsidized health care coverage.

Subsidies are a crucial component of the ACA and limiting their availability to state-run Exchanges would completely undermine the statutory scheme. Chief Justice Roberts, writing for the majority, reasoned that Congress enacted the ACA to improve the health insurance market, so the Court should strive to read provisions in the ACA in such a way that is consistent with Congress’s intent.

This decision resolves many of the ambiguities surrounding the implementation of the ACA’s requirements. Employers can now count on penalties for non-compliance with the ACA’s employer mandate. This mandate is often called the “Pay or Play Mandate” or “Employer Shared Responsibility Mandate,” and employers with an average of at least 50 full-time employees (and full-time equivalent employees) are subject to the mandate. Under the ACA, an employer must provide health coverage that is affordable and provides “minimum value” or pay a penalty.  The employer may be subject to two penalties: (1) the “no offer” penalty if an employer fails to provide minimum essential health coverage; and, (2) the “insufficient coverage” penalty if the employer provides minimum essential health coverage but the coverage is either unaffordable or does not provide minimum value. In either case, employer penalties are triggered only when an employee receives subsidized coverage through an Exchange. As a result, the statutory scheme is effective only where employers are subject to the threat of penalties which are triggered through the provision of health care subsidies to individuals. This ruling makes it clear that subsidies are available for all Exchange plans—whether offered through the state or the federal government—and; thereby, all employers in those states face the threat of ACA penalties. In light of this ruling, it is crucial for employers to evaluate the potential costs to their organization to determine whether they will pay the penalty or offer adequate coverage to full-time employees and their dependents.

If you have any questions regarding this alert, how this ruling impacts your organization or have any additional questions about your benefits plan, please contact your McGrath North attorney.

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“Patent Trolls” In The United States Supreme Court

Patent

On May 26, 2015, a United States Supreme Court Justice used the derogatory term “patent troll” for the first time in the United States Supreme Court’s recorded history.  In Commil USA, LLC v. Cisco Systems, Inc., 135 S. Ct. 1920, 1932 (May 26, 2015) the Court was asked to decide whether a company’s good faith belief that a patent was invalid could be a legitimate defense to patent infringement, specifically induced infringement.  The case involved a patent held by Commil USA, an accused patent troll, for improving the implementation of a wireless network over a large area.  A “patent troll” is a pejorative term for a non-practicing entity (“NPE”) that earns the majority of its revenue from the licensing or enforcement of its patents.  Commil USA sued Cisco Systems for patent infringement based on Cisco System’s use of similar technology, and inducing its customers to also infringe.  In defense, Cisco Systems admitted that it knew about Commil USA’s patent and that it’s use of Commil USA’s patented technology could constitute infringement.  Nevertheless, Cisco Systems argued that it shouldn’t be liable for patent infringement because it believed, in good faith, that Commil USA’s patent was invalid.  The Court was encouraged to allow a belief-of-invalidity defense in order to combat “abusive patent assertion” by the so-called patent troll Commil USA.

In a 6-2 decision, the Court ruled against Cisco System, holding accused patent infringers can’t evade claims of “induced infringement” by arguing they had a “good faith belief” the patent was invalid.  Notably, the Court recognized patents have a statutory presumption of validity.  Thus, Cisco System’s mere belief that it was acceptable to infringe Commil USA’s patent simply because the patent was no good, undermined the statutory presumption of validity.  The Court’s decision ultimately took away a powerful defense for accused patent infringers.

While the Court’s decision was significant in itself, Justice Antonin Scalia’s strongly worded dissent was further noteworthy.  Disagreeing with the majority, Justice Scalia argued it was “impossible” for anyone to induce infringement if they believed the patent was invalid in the first place.  Justice Scalia claimed the majority’s decision had ultimately “increase[d] the in terrorem power of patent trolls”—the first time the contentious term had ever been used in a United States Supreme Court opinion.  Thus, Justice Scalia’s reaction to the majority’s decision in Commil USA, LLC v. Cisco Systems, Inc. indicates the debate over how to combat abusive patent litigation is far from over.

  • Luke C. Holst is a registered patent attorney with experience in both patent prosecution and patent litigation. Holst is a former Patent Examiner at the U.S. Patent and Trademark Office; Law Clerk to the Honorable Mark W. Bennett at the U.S. District Court for the Northern District of Iowa; and Legislative Counsel at the U.S. Capitol to an Iowa Congressman on the U.S. House of Representatives Committee on the Judiciary. At McGrath North, Holst works on patent issues, other intellectual property matters, and litigation.
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Supreme Court Revives Pregnancy Discrimination Case

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“[W]hy, when the employer accommodated so many, could it not accommodate pregnant women as well?” This is the question the United States Supreme Court posed to the Fourth Circuit in Young v. United Parcel Service, Inc., as it voted 6-3 to revive a pregnancy discrimination case where a pregnant employee was denied an accommodation. This is the Court’s first ruling since 1991 on employers’ duties toward pregnant workers.

Peggy Young worked as a part-time driver for United Parcel Service, Inc. (“UPS”). Her responsibilities included pickup and delivery of packages. In 2006, Young became pregnant and her doctor told her that she should not lift more than 20 pounds during the first 20 weeks of her pregnancy and not more than 10 pounds thereafter. UPS required drivers like Young to be able to lift packages weighing up to 70 pounds and up to 150 pounds with assistance. UPS had a collective bargaining agreement with a union that provided for reassignments to be available to workers with job-related injuries, those who lost their driver’s certification, and those considered permanently disabled under the Americans with Disabilities Act. Because Young did not fall into any of those categories, UPS did not allow her to work while under her lifting restriction. Young subsequently brought action against UPS claiming she was discriminated under Title VII because UPS refused to accommodate her while giving temporary assignments to other employees.

After the Court agreed to hear this case, the Equal Employment Opportunity Commission (“EEOC”) issued new guidelines which provided that “[a]n employer may not refuse to treat a pregnant worker the same as other employees who are similar in their ability or inability to work by relying on a policy that makes distinctions based on the source of an employee’s limitations (e.g., a policy of providing light duty only to workers injured on the job).” Although urged to give weight to these guidelines, the Court refused because they lacked the timing, consistency, and thoroughness of consideration necessary to “give it power to persuade” because (1) the guidelines were issued after it agreed to hear this case; (2) the position of the guidelines is inconsistent with positions for which the Government has long advocated; and, (3) the EEOC did not explain the basis of its latest guidance.

The Court ultimately adopted a “middle ground” approach and rejected the positions of both parties. Young argued that whenever an employer accommodates only a subset of workers with disabling conditions, it must provide the same accommodation to pregnant workers even if other non-pregnant workers do not receive accommodations, thus providing pregnant workers with “most-favored-nation” status. UPS, on the opposite end of the spectrum, argued that employers should be allowed to have neutral policies like seniority systems and special preferences for workers who are injured on the job and that employers are not prohibited from denying pregnant women accommodations on the basis of an evenhanded policy (e.g., light duty only offered to those with on-the-job injuries, regardless of whether the employee is pregnant or not).

The Court determined that an individual pregnant employee may show a case of discrimination through the application of what is known as the McDonnell Douglas framework. There, the employee must first show that: (1) she is a member of a protected class (here pregnant); (2) she sought an accommodation; (3) her employer did not accommodate her; and, (4) her employer did accommodate others “similar in their ability or inability to work.” Once the employee shows this evidence, the employer may justify its refusal to accommodate the employee by relying on “legitimate, nondiscriminatory” reasons for denying her accommodation. If the employer shows such reasons, the employee may in turn show that the employer’s proffered reasons are in fact pretextual. Importantly, the Court stated that the legitimate, nondiscriminatory reason proffered by the employer “normally cannot consist simply of a claim that it is more expensive or less convenient to add pregnant women to the category of those (‘similar in their ability or inability to work’) whom the employer accommodates.”

The Court sent Young’s case back to the Fourth Circuit Court of Appeals. The Fourth Circuit is now tasked with considering the facts of this case under the Supreme Court’s standard outlined above.

Where do we go from here? It is important to note that after the Supreme Court agreed to hear this case, UPS changed its policy and now treats pregnant employees in need of reasonable accommodations the same as workers with on-the-job injuries, giving them light-duty assignments if available. Employers should review their reasonable accommodation policies with respect to allowing pregnant employees light duty assignments in light of the Court’s decision. It can also be anticipated that the EEOC will revisit its guidelines and try to reassert the very same position which was rejected here, but do it the right way.

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Supreme Court to Issue Critical Health Care Reform Ruling

Supreme Court Health Care Ruling

The U.S. Supreme Court has agreed to review a challenge to health care reform subsidies.  At issue is whether the program of tax credits applies only in the state Exchanges and not in federally operated Exchanges.

The Court declined to wait for further action in lower federal courts, as the Obama administration had asked.  Now, the Court has ensured that it will rule on the case during the current term.  If it decides to limit the subsidies to the state-run Exchanges, it is widely understood that an unfavorable ruling on federal subsidies would destroy health care reform’s overarching structure.  The Court is expected to issue its ruling in June or July 2015.

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The Federal Tax Implications of the Supreme Court’s Decision on Same-Sex Marriages

DOMAOn June 26, 2013, the Supreme Court of the United States ruled in the well-publicized decision United States v. Windsor that Section 3 of the Defense of Marriage Act (“DOMA”) was unconstitutional. Section 3 of DOMA defined “marriage” as exclusively the union between a man and a woman and “spouse” as a person who is married to someone of the opposite sex. Prior to the Windsor decision, these definitions were to be used for all provisions of federal law, including the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “Code”). In light of DOMA, many of the tax benefits available to spouses were not extended to same-sex spouses. Where employers attempted to provide comparable benefits (e.g., health plan benefits) to same-sex spouses, employers were required to impute the value of that coverage to the employee as income. This resulted in additional taxable income to the employee and additional employment taxes for the employer.

In the wake of the Windsor decision, companies were left with very little guidance as to how to interpret and apply the ruling, including whether and to what extent they would be required to adjust their practices retroactively. In light of that uncertainty, most employers adopted a ‘wait and see’ approach to permit the government time to issue additional guidance.

IRS Guidance

The long-anticipated guidance was issued on August 29, 2013, when the Treasury Department and the Internal Revenue Service (the “Departments”) issued Revenue Ruling 2013-17. In the Ruling, the Departments stated that same-sex couples who are legally married in a jurisdiction that recognizes same-sex marriages will be treated as married couples for federal tax purposes, regardless of where they currently live. This is often referred to as the “state of celebration” rule because the laws of the state that issued the marriage certificate will dictate whether parties are considered married for federal tax purposes, regardless of whether the individuals actually live in the state of marriage. The Department’s Ruling became effective on September 16, 2013 (and for certain purposes, retroactively).

The Revenue Ruling applies for all purposes under federal tax law where marriage is a factor. This includes the following:

•   income tax filing status;

•   gift and estate taxes;

•   claiming personal and dependency exemptions;

•   taking the standard deduction;

•   retirement plans;

•   contributing to an IRA; and

•   claiming the earned income tax credit or child tax credit.

This Ruling does not apply to registered domestic partnerships; the Ruling is limited to same-sex individuals who are lawfully married under state law.

NOTE: The IRS did not specifically address the impact of this Ruling on state tax laws. However, the Ruling does not necessarily change state tax law. We expect that over the next few months, states will issue guidance specific to the impact of the IRS ruling on state tax laws.

The Ruling provides that legally married, same-sex couples must file their 2013 federal tax return using either the married filing jointly or married filing separately status. These individuals may, but are not required to, file amended returns choosing to be treated as married for prior federal tax years. Similarly, the IRS explained in a series of FAQs that where an employer provided health coverage to an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, the employee can file an amended Form 1040 reflecting the employee’s status as a married individual to recover federal income tax paid on the value of that coverage. In either circumstance, claims for refunds can be filed for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. Ultimately, this means that same-sex couples may elect to claim refunds for tax years 2010, 2011 and 2012.

The IRS FAQs also indicate that retirement plans are required to comply with various aspects of the ruling. Specifically, a retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws that govern qualified retirement plans. Qualified retirement plans were required to comply with this guidance by September 16, 2013. New guidance by the IRS is expected to address plan amendment requirements including the timing of any required amendments and any necessary corrections relating to plan operations for periods prior to the issuance of this guidance.

Employment Tax Adjustments

A number of income tax and employment tax provisions provide for exclusions from gross income and wages, respectively, for certain benefits provided to the spouse of an employee. In addition, services performed by an individual in the employ of the individual’s spouse that are not in the course of the employer’s trade or business are excepted from FICA tax. As a result, employers withheld and paid employment taxes with respect to certain benefits provided to the same-sex spouse of an employee because the marriage was not recognized for purposes of the Code, and the benefits were not excludable from gross income or wages.

In follow-up to Revenue Ruling 2013-17, on September 23, 2013, the IRS provided special administrative procedures for employers to correct overpayments of employment taxes for tax year 2013 and prior years. Under this latest guidance, Notice 2013-61, the IRS offers two alternative special administrative procedures to remedy employment tax overpayments. First, employers may use the 2013 fourth quarter Form 941, “Employer’s Quarterly Federal Tax Return,” to correct overpayments of employment taxes with respect to the first three quarters of 2013. Second, employers can use Form 941-X, “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund” for the fourth quarter of 2013 to correct previous overpayment of FICA for all 2013 quarters.

For FICA tax overpayments in years before 2013, employers can make a claim or adjustment for all quarters of a calendar year on one Form 941-X filed for the fourth quarter of each year if the period of limitations for refund and credit claims is still open.

These special administrative procedures are optional. Employers that prefer to use the regular procedures for correcting employment tax overpayments related to same-sex spouse benefits, instead of the special administrative procedures, may do so.

Department of Labor Guidance

In addition to the guidance issued by the IRS, on September 18, 2013, the Department of Labor (DOL) issued Technical Release 2013-04 to address the implications of Windsor on employee benefit plans. The DOL’s guidance mirrors that issued by the IRS. Specifically, the DOL stated that with respect to ERISA, the term “spouse” will be read to refer to any individuals who are lawfully married under any state law, including individuals married to a person of the same sex who were legally married in a state that recognizes such marriages, but who are domiciled in a state that does not recognize such marriages. Similarly, the term “marriage” will be read to include a same-sex marriage that is legally recognized as a marriage under any state law.

Nebraska State Tax Law

For purposes of Nebraska state tax law, the Nebraska Department of Revenue has clearly stated that because Nebraska does not recognize same-sex marriages, same-sex spouses must file their Nebraska individual tax returns separately. The Department of Revenue’s approach cites to the Nebraska state constitution which provides that marriage is between a man and a woman; therefore, same-sex spouses, legally married in another jurisdiction cannot file Nebraska individual income tax returns using married, filing jointly or married, filing separately status. This will result in different tax treatment on the state and federal tax level for same-sex spouses filing tax returns in Nebraska. The Nebraska Department of Revenue is expected to issue additional guidance on how to file Nebraska individual income tax returns for individuals in same-sex marriages.

What does this all mean?

The bottom line is that Nebraska and Iowa employers will need to treat same-sex spouses the same as opposite-sex spouses for federal tax purposes, so long as the parties can demonstrate that they were legally married under the state law of any state. This outcome does not depend on where the couple is currently living. For instance, a couple legally married in Iowa that now lives and works in Nebraska must be treated as legally married for federal tax purposes by their Nebraska employers. In contrast, for state tax purposes, Nebraska employers should not treat same-sex spouses as legally married for purposes of state taxation. Therefore, Nebraska employers only need to adjust the treatment of same-sex spouses for federal tax purposes.

In light of the latest guidance on DOMA, we recommend the following action items for employers:

•  Communicate with Employees.  There is little doubt that your affected employees have heard about this new guidance. Take a proactive approach to allaying concerns by distributing information outlining your plan with respect to same-sex spouses and asking affected employees to meet with Human Resources to discuss the impact on their benefits.

•  Review Benefit Plan Documents and SPDs.  Review plan documents and gather information to determine the impact of this guidance. Specifically, employers should determine whether employees who were previously considered “single” should now be treated as “married” for benefit plan purposes. Employers also should review plan documents to determine how plans define key terms such as “spouse” and “marriage.” Revise summary plan descriptions as needed to reflect plan document changes.

•  Imputed Income.  Stop imputing income for federal purposes on benefits provided to legally married same-sex spouses and determine the appropriate tax treatment for state-law purposes.

•  Domestic Partners.  If your plans cover domestic partners and civil unions, evaluate whether this coverage remains appropriate.

•  Tax Gross-Ups.  Stop providing unnecessary tax gross-ups for health coverage provided to same-sex spouses. Decide how to address historical gross-ups and imputed income for prior tax years.

•  Refunds.  Decide whether to file a refund claim or adjustment for employment taxes.

•  Retirement Plans.  Same-sex spouses must be treated as lawful spouses for purposes of maximum benefit limitations, spousal consent rules, rollovers, death benefits, minimum required distributions, availability of in-service hardship withdrawals, and assignment of benefits under qualified domestic relations orders.

•  Cafeteria Plans. If an employee made a pre-tax salary-reduction election for health coverage under an Internal Revenue Code section 125 cafeteria plan sponsored by an employer, and also elected to provide health coverage for a same-sex spouse on an after-tax basis, the employer may now treat the after-tax election as a pre-tax election and begin taking pre-tax salary reductions.

•  Survivor Annuities.  Provide a qualified joint and survivor annuity and/or a qualified optional survivor annuity to all participants in same-sex marriages, if the plan is subject to the QJSA rules.

•  Spousal Waiver.  Require the consent of a participant’s same-sex spouse to the participant’s election of an optional form of benefit.

•  Beneficiaries.  Require the consent of a participant’s same-sex spouse to the participant’s designation of a non-spouse beneficiary.

•  QDROs.  Follow a qualified domestic relations order awarding benefits to a participant’s same-sex former spouse.

In light of the recent flurry of guidance relating to same-sex spouses, we recommend that our clients evaluate their payroll practices and administrative procedures to ensure that proper adjustments are made to comply with the expanded definition of spouse and marriage.

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