On June 26 2013, in United States v Windsor, the Supreme Court declared unconstitutional Section 3 of the Defence of Marriage Act, which defined 'marriage' for the purposes of federal law as marriage between a man and a woman. The Internal Revenue Service (IRS) has subsequently issued guidance on the application of Windsor for federal tax purposes generally, to employment taxes and to certain health and welfare plans. On April 4 2014 the IRS issued Notice 2014-19, which offers important guidance on the application of Windsor to qualified retirement plans. A related set of frequently asked questions clarifies that Notice 2014-19, as well as the earlier general federal tax guidance, also applies to 403(b) plans. On May 15 2014 the IRS issued Notice 2014-37, which addresses amendments to safe harbour 401(k) and 401(m) plans for compliance with Windsor.
This update considers the holdings of Notices 2014-19 and 2014-37, reviews the qualified retirement plan rules that may be affected by the federal recognition of same-sex marriage and recommends some initial compliance steps for employers.
The key holdings of Notice 2014-19 are as follows:
- The operation of qualified retirement plans must reflect the outcome of Windsor as of June 26 2013 (the date of the Supreme Court decision); and
- The documentary provisions of qualified retirement plans must be amended for consistency with Windsor by the later of December 31 2014 or the applicable deadline for adopting interim amendments.
Notice 2014-37 provides that a safe harbour 401(k) or 401(m) plan may adopt a mid-year amendment in order to satisfy this documentary requirement.
Notice 2014-19 elaborates on the application of its key holdings:
- Whether a plan amendment is required will depend on the plan's terms before Windsor. Thus, a plan that defined 'spouse' by reference to Section 3 of the Defence of Marriage Act will probably require amendment, while a plan that referred to federal law more generally may not. Even a plan that does not require formal amendment must be operated in conformity with Windsor as of June 26 2013.
- Provided that all other applicable qualification requirements are met, a qualified retirement plan will not lose its qualified status due to an amendment to reflect the outcome of Windsor for some or all purposes as of a date before June 26 2013.
- A plan amendment for compliance with Windsor as of June 26 2013 is not treated as an amendment for the purposes of Section 436 of the Internal Revenue Code, which can prohibit an amendment to a single-employer defined contribution plan when its funding level falls beneath specified thresholds, if the effect of such amendment is to increase the plan's liabilities. Thus, a plan requiring amendment for Windsor as of June 26 2013 should be amended regardless of whether Section 436 otherwise applies.
Notice 2014-19 provides a helpful list of some specific Internal Revenue Code rules whose documentary description and operational application are potentially affected by the federal recognition of same-sex marriage. These include, but are not limited to:
- the requirement that many defined benefit plans and certain defined contribution plans (eg, money purchase plans) provide survivor annuities as the default form of benefit in the absence of a spousal waiver. Such plans must also obtain spousal consent before making a loan to a married participant;
- the exemption from the survivor annuity rules described above, provided that a married participant's benefit is payable to the participant's surviving spouse on the participant's death, unless the surviving spouse consents to the designation of a different beneficiary;
- the additional alternatives for required minimum distributions and roll-overs that are available to surviving spouses, but not to non-spouse beneficiaries;
- the exception to the anti-alienation rules for the creation, assignment or recognition of a spouse's or former spouse's right to receive all or a portion of the benefits payable to a participant pursuant to a qualified domestic relations order. A corresponding rule treats the spouse or former spouse of the participant as the distributee of the qualified domestic relations order for various federal tax purposes;
- the treatment of one spouse as owning shares owned by the other spouse for purposes of determining whether:
- an employee is a key employee; and
- corporations are members of a controlled group; and
- the prohibition on employer securities in an employee stock ownership plan being allocated or accruing for the benefit of certain spouses under specified circumstances.
Specific application of Notices 2014-19 and 2014-37 to qualified retirement plans will depend on the employer sponsoring the plan, the type of plan and its mandatory and discretionary design features. Therefore, the compliance steps listed below are general in nature and should not take the place of a more detailed review in light of an employer's particular facts:
- Review the plan's operations since June 26 2013 for compliance with Windsor. Identify any potential non-compliance, together with options for correction.
- Determine whether amendments to the plan's definitions of 'marriage', 'spouse', 'husband' and 'wife', as applicable, are required for compliance with Windsor. Amend the plan as necessary.
- Review the plan's forms, such as beneficiary, spousal waiver and roll-over forms, to determine whether revisions are required.
- Confirm that administrative practices and related procedural documents treat same-sex and opposite-sex marriages equally. Thus, consistent policies should apply regarding issues such as requiring proof of legal marriage.
- Consult with any third-party administrators or other service providers to confirm their policies and practices with regard to applying Windsor to the plan.
- Clarify the differences, if any, between the treatment of same-sex and opposite-sex marriages under federal law and the laws of the state(s) in which the employer does business. A marriage that is recognised for federal law purposes may not be recognised for state law purposes.
- Review the form and operation of any non-qualified deferred compensation plans (eg, supplemental executive retirement plans) for compliance with Windsor. Although Notices 2014-19 and 2014-37 do not address non-qualified deferred compensation plans, such plans often provide benefits linked to those provided under qualified retirement plans and incorporate by reference the definitions and other provisions of qualified retirement plans.
For further information on this topic please contact Ronald G Cluett or Joanne C Youn at Caplin & Drysdale, Chartered by telephone (+1 212 319 7125), fax (+1 212 644 6755) or email (firstname.lastname@example.org email@example.com). The Caplin & Drysdale, Chartered website can be accessed at www.capdale.com.