Stock Comp And Nonqualified Deferred Comp Impacted By Supreme Court's DOMA Decision

As widely reported, the Supreme Court ruled last month 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.

We did not see how the ruling could affect stock plans until we began receiving a slew of memos and alerts on the subject from law firms, such as Goodwin Procter, Paul Hastings, and Wagner Law Group. Among more than 1,000 federal laws and regulations impacted by the Windsor ruling 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 in the same way, at least if they live in a state that recognizes same-sex marriages. While stock plans and nonqualified benefit 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.

The updates from law firms mentioned above, such as Goodwin Proctor's memo, suggest that companies should look through benefit plans and policies, as well administrative procedures, for situations where marital status matters. Companies will want definitions of spouse and married to be consistent across benefit and compensation plans. 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, and procedures to be followed for dividing grants in divorce.

As for nonqualified deferred compensation plans, a connection with the underlying qualified plan terms usually occurs in supplemental or excess 401(k) plans (i.e. deferrals for amounts over 401(k) maximums). Thus the new rules imposed by the DOMA decision will flow from the qualified plan, as explained in part of an update from Kilpatrick Townsend & Stockton. In addition, the allowable hardship withdrawals for an "unforeseeable emergency" under the 409A rules may now consider certain expenses (such as medical, tuition, and funeral costs) of same-sex spouses.

For details on the related tax impacts of the DOMA decision, see a helpful guide from CCH.