Retirement Plans, Same-Sex Marriage and the Retroactive Application of Windsor Retirement Plans, Same-Sex Marriage and the Retroactive Application of Windsor

Retirement Plans, Same-Sex Marriage and the Retroactive Application of Windsor

NOTE:  This bulletin is tailored for private employers who sponsor employee benefit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA).  There are significant differences in the impact of Notice 2014-19 on government plans and ERISA plans. If you have a government plan, please click here.
 
The United States Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA) last year in United States v. Windsor. That decision resulted in the Internal Revenue Service recognizing same-sex marriages for federal tax law purposes (including retirement plan administration) as long as the spouses were married in a jurisdiction whose laws recognize the marriage of two individuals of the same sex (even if those spouses ultimately live in a state that does not recognize their marriage).  On April 4, 2014, the IRS issued Notice 2014-19 regarding the retroactive application of the Windsor decision for 403(b) plans and qualified retirement plans such as defined benefit plans, 401(k) plans, profit sharing plans, and other defined contribution plans.  The IRS also issued a set of related Frequently Asked Questions.  The guidance must be reviewed by sponsors of all such plans – even plan sponsors in states that do not recognize same-sex marriage – because it addresses issues that relate to mandatory requirements for the tax qualification of retirement plans. 

Background

On June 26, 2013, in United States v. Windsor, the Supreme Court held that Section 3 of DOMA was unconstitutional.  Section 3 of DOMA provided that for purposes of federal law, marriage meant only a legal union of opposite-sex spouses.  On September 16, 2013, in response to Windsor, the IRS issued Revenue Ruling 2013-17 holding that same-sex couples who were married in jurisdictions that recognize their marriage ("place of celebration" rule) would be considered married for federal tax purposes, even if they actually lived in a state that does not recognize the marriage.  The IRS will not recognize for federal tax purposes domestic partnerships or similar unions that are not denominated as marriage.  The ruling applied prospectively as of September 16, 2013.  For our article regarding Notice 2013-17, please click here.
 
Plan Qualification Requirements and Amendments

In Notice 2014-19, the IRS states that qualified retirement plans' operation must reflect the outcome of Windsor as of June 26, 2013, and provide same-sex spouses with the same rights as opposite-sex spouses under the Internal Revenue Code's special rules affecting married participants in qualified retirement plans.  These rules include:

  • Qualified joint and survivor annuity (QJSA) and qualified preretirement survivor annuity (QPSA) options under plans that have a QJSA/QPSA requirement.
  • Spousal consent for alternate beneficiaries for certain defined contribution plans that are exempt from the QJSA/QPSA requirements.
  • Additional alternatives for providing required minimum distributions and rollover distributions to surviving and divorced spouses.
  • Ownership rules based on spousal status that impact controlled group membership, key employee status and ESOP share allocations.
  • Distributee rules under a qualified domestic relations order (QDRO) in the event of property allocations in a divorce.
  • Spousal consent requirements for loans from retirement plans.
  • Consideration of same-sex spouses in determining the availability of certain hardship withdrawals.
However, the IRS will not treat a plan as failing the qualification requirements if, prior to September 16, 2013, it did not recognize same-sex marriages of participants who were domiciled in a state that did not recognize same-sex marriages ("place of domicile" rule).  It provided this transition relief because the IRS did not announce its "place of celebration" rule until that date. 

A plan will not be treated as failing the qualification requirements merely because it did not recognize same-sex marriage prior to June 26, 2013.  Therefore, retirement plans are not required to give retroactive effect to the Windsor decision before June 26, 2013.  This will greatly simplify the administration of Windsor for retirement plans.  However, a plan sponsor may voluntarily amend its plan to reflect the outcome of Windsor, for some or all purposes (e.g., solely with respect to the QJSA/QPSA requirements), as of a date earlier than June 26, 2013.  If an earlier date is desired, the plan sponsor must amend the plan to specify the date as to which, and the purposes for which, the rules are applied.  The IRS cautioned that recognizing same-sex spouses for all purposes under a plan prior to June 26, 2013, may trigger requirements that are difficult to implement retroactively (such as the ownership attribution rules) and may create unintended consequences. 
 
The IRS noted that whether a plan must be amended to reflect the outcome of Windsor depends on the terms of the specific plan.    In general, plan amendments may not be necessary if a plan does not actually define the word "spouse" or if it does not define it with gender-specific terms (e.g., the terms "spouse," "legally married spouse," or "spouse under federal law" are used in the plan without distinction between same-sex and opposite-sex spouses).  In these cases, an amendment would still be a best practice to clarify that June 26, 2013 is the date on which the plan began to be administered to recognize same-sex spouses.  A clarifying amendment should also be considered if a plan recognized same-sex spouses after June 26, 2013, but used the "place of domicle" rule before September 16, 2013. However, if a plan does define spouse in a gender specific way that excludes same-sex spouses or is otherwise inconsistent with Windsor, then the plan document must be amended.
 
Amendment Deadlines for Private Employer Plans
 
The Notice provides that the amendment deadline for private employers is the later of:  (i) the IRS' deadline for interim amendments (see Revenue Procedure 2007-44 at Section 5.05); or (ii) December 31, 2014.  Consequently, most plans will face a December 31, 2014 deadline.
 
Action Steps
 
  • Review retirement plan documents 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.
  • Coordinate with third-party administrators of retirement plans to ensure that administrative practices are updated to, for example, obtain spousal consent from same-sex spouses when a participant names a non-spousal beneficiary or elects a non-QJSA form of benefit.
  • Review benefits that commenced on and after June 26, 2013 and solicit spousal consent or pay in QJSA form if applicable.
  • Educate employees that prior non-spousal beneficiary designations will be void unless spousal consent is obtained from their same-sex spouse, while using this as an opportunity to remind all participants to review and update their beneficiary designations.
  • Provide appropriate training for benefit counselors on federal law changes.
If you have any questions or would like additional information regarding the Windsor decision and the IRS' new guidance and how they will impact your plans, please contact Craig Burke, Sarah Funke, Melissa Proffitt Reese, Marc Sciscoe, Tara Sciscoe, Chris Sears or any member of Ice Miller's Employee Benefits Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances. 
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