Employers and participants alike have been anxiously waiting for further guidance from the Internal Revenue Service (IRS) on how marriages of same-sex couples will be treated for purposes of qualified retirement plans.
On April 5, 2014, the IRS issued Notice 2014-19 containing rules on plan amendments and retroactive application of the Supreme Court’s United States v. Windsor decision to retirement plans and their treatment of marriages of same-sex couples. Those rules, which have practical implications for your organization, are described in detail below.
The first part of Notice 2014-19 describes how qualified retirement plans should treat the marriages of same-sex couples following Windsor. The Windsor decision, which the Court issued on June 26, 2013, struck down as unconstitutional section 3 of the 1996 Defense of Marriage Act (DOMA) that precluded married same-sex couples from being treated as married under federal law.
While this list is not exhaustive, the Windsor decision potentially affects the following aspects of a qualified retirement plan:
- beneficiary designations and preference rules
- hardship distributions
- incidental death benefit rules
- loans (for spousal consent purposes)
- notices and disclosures to spouses
- qualified joint and survivor annuities (QJSAs)
- qualified optional survivor annuities (QOSAs)
- qualified pre-retirement survivor annuities (QPSAs)
- qualified domestic relations orders (QDROs)
- required minimum distributions (RMDs)
- control groups—family attribution rules
- prohibited transaction exemptions under ERISA
- Section 502 benefit claims under ERISA
The second part of the guidance is in a question-and-answer format. The IRS reiterates that for federal tax purposes, the guidance is inapplicable to registered domestic partnerships, civil unions, and other similar formal relationships under state law because these are not equivalent to marriage for purposes of applying the qualified retirement plan rules.
The June 26, 2013 - September 15, 2013 Gap Period
Previously, the IRS issued Revenue Ruling 2013-17 on September 16, 2013, which provides that the Windsor decision will be applied prospectively as of September 16, 2013. However, there is a gap period between the Windsor decision and the initial IRS guidance in Revenue Ruling 2013-17. During the gap period, there was no guidance on whether the state of celebration rule or the state of domicile rule would apply. Ultimately, the IRS decided to follow the state of celebration rule, which mandates a plan sponsor to treat a same-sex spouse as a spouse for federal tax purposes regardless of where the married couple resides. Accordingly, plan sponsors are only required to apply Windsor if the participant was domiciled in a state that recognized same-sex marriages during such gap period. For instance, suppose Participant A is in a 401(k) plan and is married to a same-sex spouse. Participant A’s beneficiary designation specifies her sister as a 100% beneficiary of her account balance. She was married in and resided in Maryland (one of the states that recognized same-sex marriage as of September 16, 2013 with her same-sex spouse. Participant A died on August 1, 2013. Consequently, the plan sponsor is obligated to pay benefits to Participant A’s same-sex spouse regardless of any conflicting plan terms and regardless of any previously designated beneficiary (i.e., A’s sister) or other designation to which Participant A’s spouse has not consented.
Let’s assume the facts are the same for Participant B except that this participant was married in Maryland but resides in North Carolina (a state that did not recognize marriages of same-sex couples as of September 16, 2013) with her spouse. Under this scenario, the plan sponsor could, but is not required to, apply the state of celebration rule. If the plan sponsor chooses the state of domicile rule (for the gap period), then the plan sponsor may respect the beneficiary designation on file and pay plan benefits to Participant B’s sister without jeopardizing the plan’s qualification.
Alternatively, to avoid the inconsistent results noted above, a plan sponsor may apply the state of celebration rule during the gap period—i.e., the plan sponsor would then pay plan benefits to Participant B’s spouse.
Pre-June 26, 2013
A plan sponsor may, but is not required to, apply Windsor (and recognize the same-sex spouse of a participant as a spouse for federal tax purposes) retroactively for periods prior to June 26, 2013. If the plan sponsor chooses to apply Windsor retroactively, the plan sponsor must amend the plan by the later of December 31, 2014 or the applicable date under the IRS’s general amendment guidance for qualified retirement plans, Revenue Procedure 2007-44. Happily, the IRS provides plan sponsors with considerable latitude to retroactively apply Windsor in whole, in part, or not at all for dates prior to June 26, 2013. For example, a plan may state that only the QJSA and QPSA rules will apply retroactively to January 1, 2013 to reflect Windsor and for all other purposes, the plan will reflect Windsor as of June 26, 2013. It is crucial that the amendment reflects what actually occurs in operation. In addition, any retroactive application of Windsor must comply with the nondiscrimination requirements under the Internal Revenue Code (IRC). The tricky part is how to administer a retroactive application of Windsor. One common situation that may arise is how to cure a prior lack of spousal consent. In Participant A or B’s situation above, their respective spouse had not given consent to waive his or her rights to spousal benefits. Fortunately, the IRS provides some guidance on its website by cross-referencing Employee Plans Compliance Resolution System (EPCRS) principles described in section 6.04(1) of Revenue Procedure 2013-12. Based on EPCRS principles, the plan sponsor can go back and ask for spousal consent. The practical effect of this guidance is to provide a practical alternative for plan sponsors instead of requesting an interpleader to resolve plan qualification issues, which was an approach taken in the Cozen O’Connor, P.C. v. Tobits case decided in July 2013.
Notice 2014-19 establishes an amendment adoption deadline of the later of December 31, 2014 or the default deadline in Revenue Procedure 2007-44 relating to the extended due date of the employer’s tax return for the tax year that includes the effective date. For most plans, the deadline will be December 31, 2014. There is a special deadline for governmental plans that requires adoption before the end of the first regular legislative session of the legislative body with amendment authority that is completed after December 31, 2014.
- Plan sponsors will need to review their plans to see if the plan terms are inconsistent with the Windsor decision or Revenue Ruling 2013-17. If so, then an amendment is required to ensure continued qualification of the plan. For example, if a plan defines “spouse” or ”marriage” by reference to DOMA or to persons of the opposite sex, then the plan sponsor must amend the plan by the applicable deadline.
- However, an amendment is not required if a plan’s terms are not inconsistent with Windsor or Revenue Ruling 2013-17. Nonetheless, a plan sponsor may wish to clarify the language.
- In Notice 2013-84, the latest Cumulative List of Changes in Plan Qualification Requirements, the IRS included post-Windsor plan language as a qualification requirement.
- The funding-based benefit restrictions under IRC section 436 do not apply to this type of required amendment with an effective date of June 26, 2013.
As we mentioned above, plan sponsors may also, but are not required to, reflect the outcome of Windsor for periods prior to the date the case was decided.
- A plan amendment is required to reflect the date and scope of the retroactive application.
- Such optional amendment must be adopted by December 31, 2014.
- The funding-based benefit restrictions under IRC section 436 applies to this type of optional amendment with an effective date prior to June 26, 2013.
- In any event, plan sponsors should communicate any Windsor related changes to participants (e.g., through a summary of material modifications or Summary Plan Description).
- The FAQ on the IRS’s website also gives a green light for plan sponsors to give new rights to same-sex couples in light of Windsor such as an amendment permitting affected participants the right to elect a QJSA, which was not available to them before Windsor.
Application to 403(b) Plans
The general application of the Windsor ruling with respect to recognition of same-sex spouses as spouses for federal tax purposes does apply to 403(b) plans. However, 403(b) plans are subject to a different amendment deadline. Rather than following the remedial amendment period discussed above, any amendments adopted based on the guidance in Notice 2014-19 must be adopted by the IRS deadline referred to in section 21 of Revenue Procedure 2013-22. However, at this point, the IRS has not yet announced the last day of the remedial amendment period for 403(b) plans.
While the IRS guidance is certainly welcome and provides clarity on amendment and retroactive application, this only applies to plan qualification and not claims under Title I of ERISA. The Department of Labor has not yet provided similar guidance on applying the Windsor decision. In the interim, there is uncertainty regarding whether a participant or beneficiary (such as a same-sex spouse) can make a benefit claim for a retroactive application of Windsor. Further, due to the gap period from June 26, 2013 to September 15, 2013, plan sponsors must carefully consider whether to apply the state of domicile rule or the state of celebration rule. Finally, plan sponsors must weigh the benefits and risks of whether to retroactively apply Windsor prior to June 26, 2013 and if so, to what degree.