Ding, ding, ding. That’s the sound of my inbox waking up to a flurry of alerts and articles about a recent Supreme Court decision that, turns out, affects stock compensation – sort of. On June 26, 2013, the high court ruled in the case of United States v. Windsor that Section 3 of the Defense of Marriage Act (DOFA) is unconstitutional. Section 3 of the DOFA was an attempt at uniformly defining marriage at the federal level, and that definition excluded same-sex marriages. The recent court ruling means that the definition of marriage is now back in the hands of the states, and there are currently 13 states and the District of Columbia that have enacted laws recognizing same-sex marriages. In jurisdictions where same-sex marriages are lawful, those in same-sex marriages are now considered to by married for purposes of any federal regulations or statutes that refer to one’s marital status.

How Does the Ruling Affect Stock Compensation?

The defeat of Section 3 of the DOFA means that we now must look at the various state statutes to determine the definition of “marriage” or “spouse” for purposes of employee benefits. Essentially, benefits subject to federal laws (ERISA, COBRA, Internal Revenue Code, etc.) fall under these provisions. According to a myStockOptions.com blog post on the subject, “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.” Although there was nothing in the Supreme Court ruling that directly addressed stock compensation, it seems that when it comes to things like policies on divorce for purposes of stock options, or transferable options, death, and other situations where a “spouse” may be involved, it’s likely many companies would opt to align with practices in place for other benefit plans that are covered under the ruling. Therefore, even though stock compensation is not specifically covered under the ruling, it is indirectly affected. The possible areas that may need a review off the top of my head are:

• Beneficiary designations
• Plan Documents and Grant Agreements
• Policies or communications on divorce and transferable options

The holding takes effect on July 21, 2013, so employers are working to immediately assess those plans affected. In addition, stock plan provisions and policies should be reviewed to align with changes being made to other covered plans (e.g. 401(k)). For example, if your stock plan mandates a default beneficiary of a “spouse” for stock options upon death, the term “spouse” may need to be redefined to include same-sex spouses where lawful. In addition, it’s likely that Human Resources and Legal are already working away to navigate this situation, so you may want to plug in now – things like employee communications and matters of policy going forward could be streamlined and should be addressed.

I’m still confused about some aspects of this – like is whether we need to look at the state where the marriage took place, or the state where the employee currently resides for purposes of applying state laws to the definition of marriage for employee benefit purposes. I guess that’s for the lawyers to figure out. Based on the number of alerts I got on this subject, they are already on that task. In a client alert, Paul Hastings gives a good description of the issues around determining applicable state laws and this entire situation in general.

The action item here is to talk to counsel and start reviewing your equity plan documents, policies and communications to determine where changes should be made. It seems logical that, just as we’ve migrated towards aligning with other benefit practices (401(k), etc.) in the past, it would make sense to similarly consider adjustments to stock plan matters in tandem with changes to required benefit plans. Just when it seemed summer was starting to fall into a rhythm of lazy, hot days (is there such a thing as a lazy day?), there’s never a dull moment.

-Jennifer