On April 4, 2014, the IRS issued long-awaited guidance regarding the application of the Supreme Court’s 2013 decision in United States v. Windsor (recognizing “same-sex” marriage for purposes of federal law) to employer-sponsored retirement plans. Notice 2014-19 and the related Frequently Asked Questions (“FAQs”) answer several lingering questions regarding (i) the retroactive effect of the Supreme Court’s decision regarding the rights of same-sex spouses, and (ii) the need for, and the timing of, amendments to qualified plans and Section 403(b) arrangements.
Prior to the Windsor ruling, Section 3 of the Defense of Marriage Act (“DOMA”) defined “marriage” (for purposes of virtually all federal laws) to mean only a legal union between one man and one woman. In Windsor (which was decided on June 26, 2013), the Supreme Court held that Section 3 of DOMA is unconstitutional because it violates Fifth Amendment principles of equal protection. Subsequently, the IRS held (in Rev. Rul. 2013-17) that, for Federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife” include individuals legally married to a person of the same sex, and that the term “marriage” includes such a marriage between individuals of the same sex, but that such terms do not include individuals who have merely entered into a civil union or a registered domestic partnership. Revenue Ruling 2013-17 (which was effective as of September 16, 2013) also held that, for Federal tax purposes, the IRS will recognize a marriage of individuals of the same sex that was validly entered into in a state whose laws authorize same-sex marriage, even if the couple currently reside in a state that does not allow (or recognize) such marriages.
Now, with the issuance of Notice 2014-19 and the related FAQs, the IRS has clarified the effective date of the Windsor ruling for qualified plans and Section 403(b) arrangements. This latest guidance also specifies when qualified plans that include provisions inconsistent with Windsor or Rev. Rul. 2013-17 must be amended.
According to the Notice, qualified plan operations must reflect the outcome of the Windsor decision as of June 28, 2013. This means that qualified plans will not be disqualified merely because the plan did not recognize same-sex marriages prior to that date (even though Windsor technically nullified Section 3 of DOMA retroactive to its date of passage in 1996, and even though the IRS has ruled that taxpayers may rely on the decision retroactively for limited purposes with respect to the tax treatment of certain health coverage and fringe benefits). However, the guidance also clarifies that qualified plans will not be disqualified merely because, for periods between June 28, 2013, and September 16, 2013, the plan recognized same-sex marriages only if the participant was domiciled in a state that recognized same-sex marriage.
Therefore, from an operational standpoint, qualified plans must recognize same-sex marriages (where the couple actually reside in one of the approximately 18 states that have legalized same-sex marriage) for periods on or after June 28, 2013, and must recognize all same-sex marriages (regardless of where the couple reside) as of September 16, 2013. Plans may, but are not required to, recognize same-sex marriages for periods prior to June 28, 2013 (although if they do, a special plan amendment may be required, as discussed below).
Qualified Plan Amendments
According to Notice 2014-19, whether a qualified plan must be amended to reflect the Windsor decision depends on the terms of the plan. If the plan document defines the terms “marriage,” “spouse,” “husband,” or “wife” (or any other term that relates to the marital relationship) by reference to Section 3 of DOMA, or if the plan provisions are otherwise inconsistent with the outcome of the Windsor decision or the IRS’ guidance in Rev. Rul. 2013-17, the plan must be amended. However, if the terms of the plan document are not inconsistent with the outcome of the Windsor decision and the IRS’ subsequent guidance (for example, the plan terms referencing the marital relationship do not distinguish between same-sex and opposite-sex spouses), the plan does not have to be amended (although, according to the IRS, a clarifying amendment may be “helpful” for plan administration).
If a qualified plan has provisions that are inconsistent with Windsor and/or subsequent IRS guidance, the plan must be amended by the latest of:
- The last day of the first plan year in which the plan was affected by the Windsor decision;
- The extended due date of the employer’s tax return for the employer’s tax year that includes the date the plan was first subject to the Windsor decision; or
- December 31, 2014.
For employers with calendar-year plan years and calendar-year tax years, the plan must be amended by December 31, 2014. For employers with non-calendar-year plans (or non-calendar-year tax years), the deadline may be later. Governmental plans need not be amended before the close of the first regular legislative session of the legislative body with authority to amend the plan that ends after December 31, 2014.
If an employer elects to operationally apply Windsor retroactively (i.e., for periods prior to June 26, 2013), the plan must be amended to specify the date as of which, and the purposes for which, the rules are to be applied in that manner.
Effect on Section 403(b) Plans
The FAQs that were posted on the IRS’ website in connection with Notice 2014-19 clarify that the rules of Rev. Rul. 2013-17 apply for all Federal tax purposes, including the tax rules that apply to Section 403(b) plans. Thus, the “effective dates” discussed above also apply for purposes of determining when a Section 403(b) plan must operationally comply with the Windsor decision and subsequent IRS guidance. However, Section 403(b) plans are not subject to the amendment deadlines that apply to qualified plans. Consequently, Section 403(b) plans with plan language that is inconsistent with Windsor do not need to be amended until the end of the special 403(b) “remedial amendment period” described in Rev. Proc. 2013-22 (which is based on the last day of the period that sponsors will have to adopt “pre-approved” 403(b) plans, once those plans are approved by the IRS).
Action Items for Plan Sponsors
Employers sponsoring qualified plans should consult with counsel to determine whether their plans must be amended to comply with Windsor and subsequent IRS guidance. If amendments are required, such amendments should be adopted by the December 31, 2014 (or other applicable) deadline. Employers sponsoring qualified plans or Section 403(b) plans should also take steps to ensure that their plans were in fact operated in accordance with the Windsordecision for periods after June 26, 2013, and in accordance with Rev. Rul. 2013-17 for periods after September 16, 2013. According to the FAQs, operational failures that occurred after the June 26, 2013 effective date of the Windsordecision (such as failing to obtain the consent of a same-sex spouse where spousal consent is required) should be corrected using principles similar to those described in the Employee Plans Compliance Resolution System (“EPCRS”).