Benefits Issues Arise When Same-sex Relationships End
| Publication year | 2013 |
| Pages | 77 |
Family Law
Benefits Issues Arise When Same-Sex Relationships End
Kristi Anderson Wells
Family Law articles are sponsored by the CBA Family Law Section to provide information to family law practitioners. Articles focus on practice tips and discussions of current issues within the realm of family law.
Coordinating Editors
Patricia A. Cooper, Denver, of the Law Office of Stephen J. Harhai-(303) 329-8300, tcooper@harhai. com; Meredith Patrick Cord, Colorado Springs, of Johnson & Cord, PC-(719) 471-4034, mpc@johnsoncord. com
About the Author
Kristi Anderson Wells is special counsel at the law firm of Gutterman Griffiths PC, where she practices family law-(303) 858-8090, kwells@ggfamilylaw.com.
This article provides a general overview of the current state of the law on same-sex marriages and the Defense of Marriage Act, and examines the complex issues surrounding the division of benefits in the context of same-sex breakups.
For a family law attorney, the story is a familiar one. A married couple has been together for more than twenty years, but the relationship is now over. They have a child, a dog, two cars, and a home they purchased and decorated together over the years. There are bank accounts and retirement plans to be divided. One or both parties are working, and somebody needs to pay for the child's health insurance. The breakup is hard for both parties, but they work through the issues and come out on the other side with two households, ready to move on with their lives.
This is an everyday situation for most family law attorneys. However, when the two parties are the same sex, it is not business as usual when it comes to figuring out how benefits will be handled. This article discusses the benefits issues that arise during the breakup of a same-sex relationship. With the U.S. Supreme Court having ruled in June 2013 regarding the unconstitutionality of Section 3 of the federal Defense of Marriage Act (DOMA),[1] it is imperative that family law practitioners understand the issues and be prepared to address them.[2] On March 12, 2013, the Colorado Legislature approved the civil unions bill,[3] which provides that individuals in same sex unions are eligible to have their property, including retirement benefits, subject to equitable division under state law.
For purposes of this article, the term "same-sex partners" refers to same-sex partners who are in a civil union recognized by the state of Colorado.
The Dilemma
According to a recent study by the Williams Institute, a prestigious gay legal think-tank, nearly 150,000 same-sex couples have either married or registered civil unions or domestic partnerships.[4] That number constitutes about one-fifth of the same-sex couples who acknowledged themselves as being in a same-sex relationship in the U.S. Census report.[5] Approximately 1% of the married or registered same-sex couples get divorced in any particular year.[6] This leads to a divorce rate of close to 50%.
The recent passage of the civil unions statute in Colorado means that same-sex couples are eligible to divorce in this state. This means that a domestic practitioner likely will be faced with a same-sex divorce in the very near future, if he or she has not already encountered one. Family law practitioners should be ready to analyze all individual plan documents to determine whether and how benefits under these provisions may be allocated in same-sex breakups in Colorado.
Overview of the Law
The majority of employee benefit plans are subject to federal law. For the most part, the benefits that family law attorneys deal with are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA),[7] the Internal Revenue Code of 1986, as amended (Code),[8] or both.
Under DOMA, the word "marriage" is defined for purposes of all federal laws as being "a legal union between one man and one woman."[9] Similarly, under DOMA, the word "spouse" refers "only to a person of the opposite sex who is a husband or a wife."[10] The law also permits states to refuse to recognize or give effect to same-sex marriages recognized in other states.[11]
On June 26, 2013, in a 5-4 decision, the U.S. Supreme Court struck down Section 3 of DOMA, defining marriages only as contracted between a man and a woman.[12] It did so on the basis that Section 3 of DOMA created a two-tiered marriage system where state-sanctioned same-sex marriages were denied validity under federal laws. Thus, couples whose relationships are recognized in their state as marriages now are provided the benefit of federal laws, including the protections of ERISA and the Code that apply to benefits.
Currently, Colorado does not formalize or recognize same-sex marriages.[13] Civil unions are permitted effective May 1, 2013.[14] The civil unions law authorizes any two unmarried adults, regardless of sex, to enter into a civil union. This law also provides that same-sex couples who are legally married in another state now have a recognized civil union in Colorado. Once in a recognized civil union, the parties are provided most of the rights, benefits, protections, duties, obligations, responsibilities, and other incidents under Colorado law that are granted or imposed on spouses in this state. The statute specifically states that, because Colorado income tax filings are tied to the federal income tax scheme, which does not currently recognize civil unions, the law does not permit parties to a civil union to file joint income tax returns.
There does not appear to be anything in the U.S. Supreme Court's recent ruling that would address the constitutionality of Colorado's DOMA provision. In addition, the ruling does nothing to require the federal government to recognize Colorado civil unions as being equivalent to marriages. Thus, at least for now, there exists a two-tiered system in Colorado: the state recognizes state rights for same-sex relationships as civil unions, but denies those in same-sex relationships the status of "marriage." By doing this, Colorado effectively denies those in same-sex relationships the benefits of marriage under federal statutes.
In some cases, benefit plans are not governed by federal law. However, a blanket statement that plans that are not subject to ERISA are not subject to federal law oversimplifies the analysis.[15] Often, even plans that are not subject to ERISA or the Code will fall under some other federal statute, such as the Public Health Service Act, which may indirectly subject such plans to federal law. In those few cases where the domestic practitioner has determined that no federal law applies to a given benefit arrangement, he or she must look to state law and the plan document to determine whether recognition of the same-sex relationship is permitted.
Thus, same-sex spouses in Colorado who previously were without the protection of the Uniform Dissolution of Marriage Act now are relieved of the specific problems that faced couples forced to turn to civil remedies for dividing joint property. The often expensive and unpredictable world of the partition action is now a thing of the past for same-sex spouses divorcing in Colorado. However, these same couples are still subject to disparate tax treatment at both the state and federal level.
Basic Tax Concerns in Same-Sex Divorces
In the context of opposite-sex marriages, family law practitioners are generally familiar with the basic tax rules. A transfer of property made incident to a decree of divorce or a decree of legal separation is not a taxable event.[16] A transfer is made incident to a divorce or a legal separation if it relates to the cessation of marriage.[17] A transfer relates to the cessation of marriage if it is made pursuant to a divorce or separation agreement as defined in Code § 71(b)(2) and the transfer occurs not more than six years after the date on which the marriage ceases.[18] Code § 71(b)(2) defines a divorce or separation instrument as:
1. a decree of divorce or separate maintenance or a written instrument incident to such a decree;
2. a written separation agreement; or
3. a decree requiring a spouse to make payments for the support or maintenance of the other spouse.[19]
In general, that means that in the context of traditional marriage, transfers made pursuant to a decree of divorce or legal separation are not taxable. Following the U.S. Supreme Court ruling on DOMA, this analysis also will apply to same-sex couples in state-sanctioned marriages.
That said, given that federal law does not recognize same-sex civil unions as a marriages, Code §§ 1041 and 71 do not apply to same-sex civil unions. Therefore, in states that do not recognize same-sex marriages, the transfer of property incident to a same-sex divorce triggers a taxable event.[20]
Retirement Plan Issues
Many of the important benefits that are divided in dissolutions would not be divisible were it not for the fact that the parties are recognized as married. As noted above, in any retirement plan that is governed by ERISA or the Code, a person's marital status will be determined by reference to state law. State laws regarding the validity of marriage differ, with some states refusing to recognize marriage between parties of the same sex.
Some of the retirement plan benefits and rules that differ based on the sex of the parties include:
1. qualified domestic relations orders (QDROs);
2. qualified joint and survivor annuities (QJSAs);
3. qualified pre-retirement survivor annuities (QPSAs);
4. spousal consent for hardship withdrawals or loans;
5. rollovers;
6. minimum required distributions (MRDs); and
7. incidental death benefits rule.
Not all of these provisions will be important to the family law practitioner in the context of a...
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