On April 4, 2013, the US Internal Revenue Service (IRS) issued Notice 2014-19 ("Notice") addressing how retirement plans, qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended ("Code"), must treat the marriages of same-sex couples in light of the Supreme Court's decision in United States v. Windsor, 133 S.Ct. 2675 (2013) and giving guidance about what affected plans must say and by when.
In Windsor, the Supreme Court invalidated a section of the Defense of Marriage Act (DOMA) which defined marriage under Federal law as a union between one man and one woman and defined a spouse as a person of the opposite sex. Soon after the Windsor decision, the Service issued Revenue Ruling 2013-17 ("Ruling"), which held that for Federal tax purposes the terms spouse, husband, and wife, include an individual married to a person of the same sex if the individuals were lawfully married under state law authorizing same-sex marriage (the "state of celebration rule"). Based on the Ruling, the state of celebration rule applies even if the couple's state of domicile does not recognize the validity of same-sex marriages--but, it does not extend the definition of marriage to include domestic partnerships or civil unions. The Ruling applies for all Federal tax purposes, including those related to employee benefit plans, prospectively as of September 16, 2013.
Due to the uncertainty regarding the retroactive application of the Windsor decision and the Ruling, plan sponsors and plan administrators were left wondering how, and importantly when, to apply the new rules related to same-sex spouses. As promised, the Service provided additional guidance on this subject with the issuance of the Notice. Specifically, the Notice provides examples of specific Code requirements under which marital status is relevant to the payment of benefits, guidance on how to satisfy those requirements, and sets forth the time-frame by which qualified plans must be amended to comply with these new rules.
According to the Notice, as of June 26, 2013, any plan qualification requirement applicable based on a participant's marital status applies equally to participants who are married to a same-sex or to an opposite-sex spouse. However, the Notice clarifies that a plan will not lose its qualified status merely because it applied a state of domicile rather than a state of celebration rule between June 26, 2013 and September 16, 2013. The Notice also points out that while plans must apply Windsor prospectively beginning June 26, 2013, a plan is permitted to apply the outcome of Windsor for some or all plan purposes as of a date prior to June 26, 2013. But, the Service cautions that such retroactive application may create unintended consequences.
Required Amendments and Deadlines
The Notice also provides clear guidance on whether a plan must be amended to comply with Windsor and the Ruling. Specifically, unless a plan's definition of "marriage" or "spouse" conflicts with Windsor or the Ruling, for example by defining marriage with reference to DOMA, then a plan amendment is not required so long as the plan is operated in accordance Windsor, the Ruling, and the Notice. However, the Service points out that even where the definition is not inconsistent with Windsor or the Ruling, a clarifying amendment may be useful for plan administration purposes. In addition to amendments that are required to address the definition of spouse or marriage, an amendment is also necessary if a plan sponsor decides to apply the outcome of Windsor retroactively. In that case, the plan amendment must specify the date as of which, and the purposes for which, the rules will be retroactively applied.
The deadline for adopting amendments required by the Notice is the later of (i) the otherwise applicable deadline for adopting interim or discretionary amendments or, (ii) December 31, 2014. Plan sponsors should be aware that December 31, 2014 is not the deadline for every plan. Each plan should determine its particular deadline individually. Further, the Notice provides that for governmental plans, the deadline to adopt required amendments is the close of the first regular legislative session of the legislative body with the authority to amend the plan that ends after December 31, 2014.
Finally, the Notice provides that any amendments that are required as a result of the Notice will not be treated as an amendment to which Code Section 436(c) applies. Generally speaking, Code Section 436(c) prohibits an amendment to a single-employer defined benefit plan that increases the liabilities of the plan unless the plan’s adjusted funding target attainment percentage is sufficient or the employer makes the additional contribution. However, a discretionary amendment to provide retroactive application of Windsor will be treated as an amendment to which Code Section 436(c) applies and must meet the requirements set forth therein.
The hallmark of this Notice is the balancing of an obvious effort to be flexible within the limits of the Service's authority. The Service, through the Notice, provides guidance and relief under the Internal Revenue Code, and it carefully limits its relief within the scope this authority. Plan sponsors who rely on this Notice must be aware that it offers no relief or protection from participant attempts to enforce benefits rights for same sex partners. But, it does permit plan sponsors to draft an amendment that goes beyond the minimum changes required by the Notice that takes participants' interests and plan capabilities and administrative limits into account.