Wait for it: Advisers to small plans gird for DOMA aftermath

Advisers working with small businesses are girding their clients for an avalanche of new requirements following the Supreme Court's landmark decision on the Defense of Marriage Act. The unconstitutionality of DOMA will now require plan sponsors to revisit their health benefit plans, as well as the framework of their 401(k) plans. Advisers will also need to brief employees and beneficiaries on the updates to their benefit arrangements. “There will be basic record keeping and administrative reviews that need to be addressed,” said Jim O'Shaughnessy, managing partner at Sheridan Road Financial and an adviser with LPL Financial Inc.. “We'll make it a proactive process and update the beneficiary options. From our perspective, it's also an opportunity for planning.” When it comes to health benefits, employers need to review the definition of "spouse" in the plan to ensure that it reflects the employer's intent, according to Roberta Chevlowe, senior counsel in the employee benefits group at Proskauer Rose LLP. That's because now that the federal definition has changed, the plan may inadvertently exclude or cover them, depending on the language in the plan. Further, companies that already provide benefits to gay couples also need to adjust the tax treatment of those benefits. Prior to the DOMA decision, employers treated the value of health benefits for same-sex partners as income for federal tax purposes. “Now that they're spouses, they can get the same tax-free health benefits that opposite sex spouses enjoy,” said Ms. Chevlowe. It's uncertain, however, whether same sex spouses will be eligible for a retroactive refund from the Internal Revenue Service because an employee paid extra taxes on the value of health benefits “The general rule with the IRS is that you can go back three years, but we don't know whether they will open that to a longer period of time,” said Ms. Chevlowe. “In the past, they've issued some guidance for same sex couples, and they need to update it.” In addition, small outfits ought to revisit their retirement plans. Since the plans come under the Employee Retirement Income Security Act of 1974, they are governed by federal law, so these rights may be recognized even in states that choose not to recognize same sex marriage, Ms. Chevlowe said. Spouses of the same sex will also be able to claim survivors' benefits tied to retirement plans. Any paperwork related to these benefits, as well as distribution options and consent waivers, will need to be updated accordingly, said Marcia Wagner, a managing director at The Wagner Law Group. She warned, however, the real worry for plan sponsors is whether the DOMA ruling will be applied retroactively – and whether the IRS will draw up a revenue ruling to address the potential tax-related penalties that could apply to plans. In that case, same sex spouses could come calling for death benefits they didn't receive prior to DOMA becoming unconstitutional. In the worst-case scenario, if a plan fails to meet the tax qualification rules because it failed to pay a same-sex spouse a death benefit that's due if the Supreme Court decision is applied retroactively, the plan could lose its tax-qualified status. “There needs to be some kind of clarification in the tax-qualified realm that the DOMA decision has a prospective effect only,” Ms. Wagner said. “The devil is in the details.”