Governmental Plans Alert: IRS Issues Guidance Regarding Application Of The Windsor Decision To Qualified Retirement Plans
NOTE: This bulletin is tailored for government retirement systems and government plan administrators. There are significant differences in the impact of Notice 2014-19 on government plans and ERISA plans. If you have an ERISA-covered plan, please do not refer to this Notice. If you have any questions or comments concerning the effect of this Notice on your plan, please contact one of our employee benefits professionals.
On April 4, 2014, the Internal Revenue Service (IRS) issued Notice 2014-19
(Notice) regarding plan amendments that are needed to implement the decision in United States v. Windsor,
570 U.S. _____, 133 S. Ct. 2675 (2013) and Revenue Ruling 2013-17, 2013-38 I.R.B. 201 for retirement plans that are qualified under Internal Revenue Code (IRC) Section 401(a). The United States Supreme Court held in Windsor
that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional. This holding by the Court provided same-sex spouses who were married in a state that recognizes same-sex marriage the same treatment as opposite-sex spouses for purposes of federal law. In Revenue Ruling 2013-17 the IRS ruled that for federal law purposes, it would recognize same-sex marriages based upon the state of "celebration," rather than the state of "domicile," and that the IRS would also recognize same-sex marriages performed in a foreign jurisdiction.
As a result of Windsor
and Revenue Ruling 2013-17, governmental plan administrators in states that recognize same-sex marriage, as well as in states that do not, have to determine the impact on plan operation. For qualified governmental plans, the areas of greatest impact are likely to be (1) the treatment of eligible rollover distributions to same-sex spouses under IRC Sec. 401(a)(31); (2) the treatment of joint/survivor options for same-sex spouses under IRC Sec. 401(a)(9); and (3) the testing of joint/survivor benefits for same-sex spouses under IRC Sec. 415(b). In some plans, for example those with QDROS and hardship distributions, there are other considerations.
The Notice addresses a number of important points regarding the Windsor
decision, including when plan amendments may be needed, applicable plan amendment deadlines, and retroactive application of the Windsor
decision as related to retirement plans. Under the Notice, plan administrators have a deadline by which plan amendments must be adopted, if any are needed. The Notice also makes it clear that qualified retirement plans must be operated in a manner that is consistent with the Windsor
decision as of June 26, 2013
, and with Revenue Ruling 2013-17 as of September 16, 2013
Need to Amend
The Notice explains in a question and answer format the IRS' view of what type of plan provisions may require an amendment to comply with Windsor
and Revenue Ruling 2013-17. The Notice states that a plan must be amended in order to be in compliance with IRC Section 401(a) if the plan references section 3 of DOMA when defining a marital relationship or is otherwise inconsistent with the Windsor
decision, Revenue Ruling 2013-17, or Notice 2014-19. If a plan utilizes terms such as "spouse," "legally married spouse" or "spouse under Federal law," without distinction between a spouse of the same-sex or opposite-sex, such a plan is probably not required to be amended for purposes of federal law compliance. Plans should consider whether the terms used in its structure, such as "spouse under state law" or "opposite sex spouse" would prevent application of the required federal law provisions, such as rollover rights, 401(a)(9) compliance and 415(b) testing. There are no amendments required by this Notice that would change the fundamental state law benefit structure, such as certain opposite sex survivor benefits. Obviously, issues with regard to the benefit structure will depend on state law and potentially resolution of pending court cases.
A plan administrator could decide that, even if an amendment to the definitions of certain terms is not absolutely needed, a direction to recognize same-sex marriages in certain plan situations may be helpful to vendors or others who handle daily administration.
Amendment Deadline for Governmental Plans
The IRS recognized the additional time it may take for a governmental qualified plan to be amended to be in compliance with the Windsor
decision and/or the related IRS guidance. The IRS stated that an amendment for a governmental plan "need not be adopted before 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." For example, a state plan where the state legislature meets annually from January to April would have until the end of the January to April 2015 session to get an amendment enacted. For a municipal plan where the legislative body meets monthly (for example), the amendment deadline could be in January 2015. In any event, the amendment (if needed) should be adopted prior to the deadline.
Amending Plans to Adopt the Windsor Decision Prior to June 26, 2013
While plan administrators must timely implement the Windsor
decision no later than June 26, 2013, and Revenue Ruling 2013-17 no later than September 16, 2013, plans may also be amended to adopt the Windsor
decision as of a date before June 26, 2013. It should be noted that amending plans to recognize same-sex spouses on a date prior to June 26, 2013, will require consideration of how to deal with the retroactive change. For example, if a retired member was not allowed to select a 100% joint/survivor option for a same-sex spouse prior to June 26, 2013, and the plan sponsor chooses to later amend the plan to recognize same-sex marriages back to January 1, 2013 (for example), the plan would need to retroactively give the member retiring on or after January 1, 2013 a new election for a 100% joint/survivor option. In that case, the plan could then provide for retroactive payment adjustments to recognize the new election.
Review the plan document to determine if plan amendments are needed and the deadline for adoption of any required plan amendment under the Notice.
Review forms and other plan materials provided electronically or in paper form to determine consistency with Windsor and IRS guidance.
Provide appropriate training for benefit counselors on federal law changes.
Promulgate necessary and discretionary amendments on a timely basis.
If you have any questions or comments regarding the information contained in this Notice, do not hesitate to contact one of our employee benefit professionals
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
Circular 230 Disclosure
Except to the extent that this advice concerns the qualification of any qualified plan, to ensure compliance with recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including any attachments, is not intended or written by us to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the federal government or for promoting, marketing, or recommending to another party any tax-related matters addressed herein.