Are stock plans affected by the Supreme Court's decisions on marriage equality?
These rulings do affect stock plans, though somewhat indirectly. It is helpful to start with some background information about the Supreme Court's decisions.
The Decisions In Favor Of Marriage Equality
During June 2013, the Supreme Court ruled in US v. Windsor that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional. Section 3 provided that only opposite-sex marriages would be recognized as valid for the purposes of federal law. As a result of the decision, people in same-sex marriages recognized under the laws of the states where they live are considered married for the purposes of federal statutes and regulations that mention or involve marital status. This first decision on marriage equality encouraged various actions by companies, along with guidance from the IRS, the Department of Labor, and the SEC.
Then, during June 2015, Supreme Court ruled in Obergefell v. Hodges that states cannot deny a marriage license to two people of the same sex and must recognize same-sex marriages registered in other states.
Impacts On Benefit Plans
While the Obergefell decision was a more significant societal landmark, the Windsor decision had a bigger impact on stock plans. It led companies to look through benefit plans and policies, as well administrative procedures, for situations where marital status matters. As a result, companies had already made many changes even before the Obergefell ruling in June 2015. Among more than 1,000 federal laws and regulations touched by the rulings are those which affect the design and administration of employee benefit plans. In short, spousal provisions in employee benefit plans should treat same-sex spouses and opposite-sex spouses consistently. While stock plans are not affected by federal laws in the same way as qualified retirement plans (e.g. a 401(k) plan) or health and welfare plans, the changes that will be required in these other benefit plans will probably lead to similar modifications in stock plan documents.
Implications For Stock Plans
In general, companies will want the definitions of spouse and married to be consistent across benefit and compensation plans, and will extend to same-sex spouses the identical rights that they extend to opposite-sex spouses. In any place where your stock plan documents, forms, and procedures refer to a spouse, this reference can now be defined to include same-sex spouses. This type of wording may appear in spousal consents, beneficiary designations (and default beneficiary rules), limits on transferable options, surviving-spouse rights to stock grants upon death, procedures to be followed for dividing grants in divorce, and insider-trading policies.
The Windsor decision affects SEC rules by changing the definition of spouse, including regulations concerning stock plans and executive stock sales. For example, Form S-8 allows the registration of an option exercise and stock resale by an employee's "family member" who has acquired the options from the employee through a gift or a domestic relations order. The term family member now includes a spouse or former spouse in a same-sex marriage. Shortly before the Obergefell decision, the SEC also released additional guidance on the definitions of spouse and marriage.
Guidance From The IRS And The US Department Of Labor
In October 2015, the IRS proposed regulations that will amend various sections of the Internal Revenue Code in response to the Supreme Court's two decisions on marriage equality. In accordance with prior IRS guidance, the proposals provide that the terms spouse, husband, and wife will denote any individual lawfully married to another individual, and that the term husband and wife will mean two individuals lawfully married to each other, regardless of their sex. The proposed regulations also make it clear that these terms do not include individuals who have entered into a domestic partnership, a civil union, or any other similar relationship recognized by state law that is not denominated as a marriage under state law.
Alert: IRS rulings such as those on the transfer of stock options in divorce would apply to same-sex marriages.
In December 2015, the IRS released Notice 2015-86 to issue guidance on the application of Obergefell to certain employee benefit plans, such as qualified retirement plans. As the IRS points out in the guidance, it does not see any significant impact by the Obergefell decision on the application of federal laws to employee benefit plans because Windsor and its related IRS guidance required changes earlier in these laws. For more on the guidance in Notice 2015-86, see a commentary from the law firm McGuireWoods.
In US Deparment of Labor Technical Release No. 2013-04, the DOL clearly states that the ERISA definition of marriage and spouse includes same-sex persons validly married in a state where the marriage was celebrated, regardless of the state where the couple lives. Additional guidance is expected from the IRS and the DOL in the wake of Obergefell. After Windsor, the big issue was the recognition of any same-sex marriage outside the state where it was registered, but as Obergefell requires states to recognize all same-sex marriages, this problem has been solved. While companies in states not allowing same-sex marriages might have ignored IRS and DOL guidance before Obergefell, now all companies must follow the guidance.
For details about the tax impacts of the Supreme Court's Windsor ruling, see a helpful commentary from CCH on the related IRS guidance, which still applies after the Obergefell decision. A white paper from Prudential considers financial planning for LGBT couples after both Supreme Court decisions.