Following a spate of district court cases in response to United States v. Windsor, 133 S. Ct. 2675 (2013), some same-sex surviving spouses are asking retirement plan sponsors to review previously denied death benefit claims. Among them has emerged Passaro v. Bayer Corp. Pension Plan in the United States District Court in Connecticut, which attempts to reach into the past to claim Qualified Preretirement Survivor Annuity (“QPSA”) benefits post-marriage, but pre-Windsor. The key issue in this case will be the retroactive application of Windsor to qualified retirement plans.
In the complaint, the plaintiff alleges that the pension plan denied him benefits of a QPSA in violation of the terms of the plan and of governing federal law. The state of Connecticut recognized same-sex marriages beginning November 12, 2008, and the plaintiff was married in the state later that month. The spouse vested under the plan died in January 2009. When the plaintiff requested benefits under the plan, the plan sponsor denied the request citing section 3 of the Defense of Marriage Act (“DOMA”). On June 26, 2013 the Supreme Court declared section 3 of DOMA unconstitutional in Windsor, and the plaintiff unsuccessfully appealed the denial of plan benefits in early 2014. The plaintiff then filed his complaint in May 2014.
The question here is whether the Court’s decision in Windsor can have a retroactive effect to require payment of a QPSA to a surviving spouse when the pensioner died before the opinion was issued. The complaint states that the plaintiff, as a result of the Windsor decision, qualified and qualifies as a spouse at any and all times relevant to the question of his entitlement to a mandatory QPSA under the plan. While the complaint does not state a legal rationale for the retroactive entitlement to the QPSA, one can assume that the argument is simply that because the relevant law was held unconstitutional in Windsor, the plan sponsor should act as though the law never existed at all and pay benefits to the surviving spouse although his marriage was not recognized under federal law until four years after the pensioner’s death.
Historically, the Supreme Court’s application of retroactivity of federal laws has been varied, and it has taken into account practical considerations in both criminal and civil cases. The seminal case considering retroactivity in criminal cases was Norton v. Shelby County, 118 U.S. 425 (1886) which announced a seemingly bright line rule, “[a]n unconstitutional act is not a law … it is, in legal contemplation, as inoperative as though it had never been passed.” The major distinction that subsequent courts have made when considering the question of retroactivity is the more serious nature of criminal cases involving a loss of freedom, compared with civil cases involving a loss of property. In modern jurisprudence there is no assumption that new decisions will be applied retroactively in either civil cases or criminal cases, and for this reason, any reliance on the 1886 statement rests on a rickety foundation. The modern test for retroactive application in the civil context was set forth in Chevron Oil Co. v. Huson, 404 U.S. 97 (1971), which permits a court to deny retroactive effect to a “new principle of law” if such a limitation would avoid “injustice or hardship” without unduly undermining the “purpose and effect” of the new rule. Because Passaro is a civil case involving a dispute over property, one can make a fair assumption that theChevron Oil framework will figure prominently in the District Court’s analysis.
It should be noted that there has been a recent circuit split on the issue of civil retroactivity and the continuing vitality of the Chevron Oil test. On June 4, 2014 the District Court for the Eastern District of Pennsylvania wrote that, “[w]hile the Supreme Court has not explicitly disavowed the Chevron Oilretroactivity analysis, the weight of authority holds that Chevron Oil has for the most part been superseded” by a broader test that favors retroactive application in civil cases. Z&R Cab, LLC v. Phila. Parking Auth., 2014 U.S. Dist. LEXIS 76565. The District Court noted that from 1997 through 2009 the 1st, 3rd, 5th, 7th and 9th Circuit Courts recognized an implied overruling of at least part of the Chevron Oil test by two Supreme Court cases from the mid-nineties: Harper v. Virginia Department of Taxation, 509 U.S. 86 (1993) and Reynoldsville Casket Co. v. Hyde, 514 U.S. 749 (1995). The 2ndCircuit, which would have jurisdiction over the Passaro case, continues to follow the Chevron Oil test. Shah v. Pan Am Servs., 148 F.3d 84, 91 (2d Cir. 1998).
The IRS, for its part, expressly considered retroactivity in Notice 2014-19, issued April 4, 2014. The Notice makes clear that qualified retirement plan operations must reflect the outcome of Windsor as of June 26, 2013. The Notice further states that the plan sponsor may amend a qualified retirement plan to reflect the outcome of Windsor for some or all purposes as of a date before June 26, 2013 (emphasis added). However, the Notice cautions that recognition of same-sex spouses for all purposes under a plan prior to June 26, 2013 may trigger requirements that are difficult to implement retroactively, and may create unintended consequences. Therefore, while the IRS leaves open to plan sponsors the option to amend their plan retroactively, it does not require them to do so. The deadline to adopt a plan amendment is December 31, 2014 for most plan sponsors. In the meantime, we will be closely following developments in this and similar cases.