Practitioners Beware: DOMA’s Effect on Same-Sex Marriage

The answer to this is not in all circumstances.

In January 1997, the General Accounting Office (“GAO”) issued a report concluding that DOMA implicates at least 1,049 federal laws, including laws related to entitlement programs such as Social Security, health benefits and taxation. The GAO updated this report in 2004 and concluded that at least 1,138 federal statutory provisions related to marital status.

Subsequent to the passage of the DOMA, seven same-sex couples and three survivors of same-sex spouses filed an action in the United States District Court, District of Massachusetts challenging the constitutionally of Section 3 of the DOMA. On July 8, 2010, Judge Tauro rendered a 39 page decision concluding that the DOMA lacks a rational basis and therefore Section 3 of DOMA is unconstitutional. Gill et al. v Office of Personnel Management, 699 F. Supp. 2d 374 (D. Mass, 2010). The Judge’s decision was subsequently stayed pending the appeal. Although, President Obama has stated that the Department of Justice will not pursue the DOMA appeals, the House of Representatives has hired an attorney, Paul Clement, to defend the DOMA against pending constitutional challenges. This appeal is currently pending in the U.S. Court of Appeals for the First Circuit.

In the meantime, federal agencies are continuing to enforce the provisions of DOMA while the constitutionality of the statute is under review.

As practitioners, we need to be cognizant of DOMA and its impact in application of the federal relative to prenuptial agreements, as well as divorce agreements. A few are outlined here that will likely have a significant effect on how practitioners approach agreements and eventually divorce proceedings.

The first of several categories of federal laws that distinguish based on marital status are: social security, medicare, and medicaid. Because DOMA defines “marriage” and “spouse” for the purpose of these statutes, many spousal benefits under these laws will not extend to same-sex spouses.

For example, two men get married. John is 35 years old and makes approximately $150,000 per year. Tim is 28 years old and is currently unemployed. The parties are married for 20 years when John decides to file for divorce. Tim has never earned more than $3,000 in a single tax year. Under the current law, although Tim should be entitled to social security spousal benefits based on the higher earner spouse, Tim will only receive social security based on his earnings and not based on his spouse’s higher earnings.

As a practitioner, this is important to consider in terms of a maintenance award. In many instances, a non-working spouse may receive maintenance until the age when social security starts; however, if a same-sex spouse is not entitled to social security, negotiations should be tailored to attribute for that factor. These exclusions to same-sex spouses extend not only to Social Security spousal benefits but also to social security disability benefits, social security benefits for surviving spouses, social security one time death benefit, medicare benefits, and medicaid spousal protections for home, resources and allowances when a spouse qualifies for long term care.

Another category of federal laws that distinguish based on marital status are the federal tax laws. Under the current laws, a married same-sex couple cannot file federal income taxes as married. A divorcing same-sex couple will also not benefit from certain tax laws attributable to divorce, namely: that property transferred between spouses due to divorce is not taxable and the transfer of retirement funds to a spouse or former spouse incident to a divorce and pursuant to a divorce or separation instrument is not a taxable transfer.

For example, Thelma and Louise were married in the State of New York on August 1, 2011. The parties are married for 10 years before Louise decides to file for divorce. Thelma has an IRA with $100,000 and agrees to give Louise half of the amount via a roll-over. What will be the tax implications of this roll-over for both Thelma and Louise on their federal income tax returns? As practitioners, we will need to advise clients regarding these situations.

With respect to health insurance, many employers and labor organizations rely upon the federal government’s definition of “marriage” to deny family health insurance policies to employees or members married to a spouse of the same sex. Therefore, in a state where same-sex couples may marry, an insurance policy which is regulated by the state must cover all married families equally. However, many large employers are self-insured and not regulated by the state, and under the federal law ERISA, they may choose whether or not to extend equal coverage to same-sex spouses under their plans.

For example, Fred and Barney enter into a prenuptial agreement. Barney works for a small company that does not provide health insurance. Fred works for a construction company, whose health insurance is not regulated by New York State. Currently, Fred’s company does not extend coverage to same-sex spouses. When drafting a prenuptial agreement, it may be important to add a provision for whether one or both parties will be financially liable for Barney’s health insurance in the event of divorce. It may also be important to discuss with the parties other options such as a separate policy for Barney, which cost will be shared equally by the parties and in the event DOMA is rendered unconstitutional or Fred’s company decides to change their policy to extend to same-sex couples, the parties agree to place Barney on Fred’s health insurance.

With respect to retirement benefits, similar to health insurance, when ERISA applies to an employer’s pension program the statute provides substantive rights to spouses. Under the current law, these rights to spouses will not extend to same-sex spouses. Bert and Ernie are getting divorced and have agreed that Bert will give Ernie half the marital portion of Bert’s pension with the United States Postal Service. Bert and Ernie’s attorneys, not aware of DOMA and federal laws, draft a provision that refers to the case of Majauskas v. Majauskas, 61 N.Y.2d 481 (hereinafter “Majauskas Formula”). Under the Majauskas formula, the actual accrued benefit is multiplied by a fraction. The numerator is the number of months of the marriage, and the denominator is the number of months of employment with pension credit upon retirement. The accrued benefit is the benefit received by the spouse upon his/her retirement. Finally the result is multiplied by the percentage to go to the other spouse. The agreement provides that in the event that Bert predeceases Ernie and neither party has commenced their benefits under the plan, Ernie shall be considered the designated beneficiary and/or the surviving spouse of Bert for purposes of establishing Ernie’s entitlement to receipt of the pre-retirement surviving spouse benefit. The agreement also provides that Bert shall designate Ernie, as a beneficiary under his pension plan, so that upon the death of Bert, Ernie shall receive the full benefit under the 50% Joint and Survivor Option.

Bert and Ernie trusting their attorneys sign an agreement that includes the above provision. Bert dies before he retires. If DOMA is still in effect when Bert dies, under federal law, Ernie will not be entitled to his pro-rata share of the pre-retirement surviving spouse benefit, or his 50% Joint and Survivor Option, despite the parties’ divorce agreement.

The above are just a few examples of the dangers involved for practitioners in the coming years if DOMA is not determined to be unconstitutional. When drafting marital agreements for same-sex couples, practitioners cannot merely rely on provisions of the agreements they have developed for heterosexual couples, but must tailor the marital agreements for same-sex couples based on the consequences of DOMA. Practitioners will certainly need to draft agreements cognizant of the fact that at least under Federal law married same-sex couples do not have the same rights as married heterosexual couples.