Court rules on same-sex spouse's rights under DC plan

October 09, 2013

In our August 2013 regulatory update we noted that the Supreme Court's decision in United States v. Windsor will present a number of challenges for plan sponsors and administrators. In Windsor the Court held that section 3 of the Defense of Marriage Act (DOMA) – which defined ‘marriage’ as “a legal union between one man and one woman as husband and wife” – was unconstitutional. Given that some states do recognize same-sex marriages and some do not, the question for sponsors and administrators now becomes: how do you determine whether a same-sex marriage is recognized under a plan?

Cozen O’Connor, P.C. v. Tobits, et al. (July 29, 2013) appears to be the first case to address this issue. In Cozen O’Connor, the United States District Court for the Eastern District of Pennsylvania held that a marriage between two women validly celebrated in Canada and (the court found) recognized in the participant's domicile of Illinois must be recognized for purposes of Cozen O’Connor's profit sharing plan. In this article we briefly review the case and then discuss its implications for plan sponsors and administrators.

Background

Like most profit sharing plans, the Cozen O’Connor plan provided that upon a participant’s death the participant’s account would be paid to the participant’s spouse unless the participant had designated an alternate beneficiary and the spouse had consented to that alternate beneficiary designation. Where there is no spouse, the plan provided that the participant’s benefit would be paid to her parents.

The plan had a ‘choice of law’ provision that stated that it was to be “construed and enforced according to the [Internal Revenue] Code, [ERISA] and the laws of the Commonwealth of Pennsylvania, other than its laws respecting choice of law, to the extent not pre-empted by [ERISA].” Pennsylvania law does not recognize same-sex marriages.

The participant and her partner were married in Canada in 2006. After the participant’s death (on September 13, 2010), both her spouse and her parents submitted rival claims to the plan.

The parents also submitted a notarized beneficiary designation designating them as beneficiaries. The beneficiary designation was not signed by the participant’s spouse, and its authenticity was disputed.

The plan filed an interpleader action, requesting that the rival claimants “be required to interplead and settle among themselves their respective claims to the money due under the Plan” and that the plan be allowed to “pay into the registry of the court all amounts due under the Plan and upon such deposit be discharged from all liability arising from the Plan.”

The court suspended consideration of the case pending the Supreme Court's decision in Windsor. After that decision the court handed down its ruling.

The court's ruling

While the decision is a little unclear, the court appears to have found that for purposes of ERISA the law of the participant’s domicile applies in determining whether or not a same-sex couple is married. Thus, the provision in the plan ‘choosing’ Pennsylvania law did not apply.

The court found that Illinois was the participant’s domicile. It further found that, while Illinois does not authorize same-sex marriages, under Illinois's civil union statute it ‘accepted as valid’ the marriage between the participant and her spouse. Thus, for purposes of ERISA and the plan, the participant was married at the time of her death.

Based on these findings, the holding is straightforward: benefits must be paid under the terms of the plan to the spouse. The beneficiary designation – without the spouse’s consent – was invalid.

Analysis

We realize this is an area of intense controversy, and individual sponsors may have views and commitments that will lead them to take one or the other side in one of these disputes. Where there is no such view, however, in any action between rival claimants in a same-sex marriage fact situation, the plan will generally want to remain neutral. In that event, an interpleader action, like the one taken by Cozen O’Connor in this case, will often be the best course.

The court (clearly) rejected the plan’s (Pennsylvania) ‘choice of law’ provision, in favor of (apparently) an ERISA ‘state of domicile’ rule. It is early days in this litigation – it’s conceivable that some other court will recognize a plan choice of law provision. Sponsors may want to review their plan choice of law provision in view of Windsor to determine whether it (1) reflects plan policy with regard to same-sex marriages or (2) will present issues in any same-sex marriage litigation.

In this case the state of celebration (Canada) and the state of domicile (Illinois) both recognized the marriage. Thus, there was no reason to argue for a ‘state of celebration’ rule rather than the ‘state of domicile’ rule that the court applied. In future litigation, where, e.g., the state of domicile does not recognize a marriage validly celebrated in a different state, that issue – state of celebration vs. state of domicile – is likely to be revisited.

* * *

This is only one case – there are likely to be many more. We anticipate a flood of litigation involving plans and DOMA issues. It's possible that one of the big questions – federal tax law treatment – may be resolved by regulations. But the resolution of two other questions – the rights of rival claimants to plan benefits (as in Cozen O’Connor) and whether and how Windsor will be applied retroactively -- is likely to be fought out in the courts.

We will continue to follow these issues.

October Three, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is the ReDB® plan design. The ReDefined Benefit Plan® represents an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.

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