Shortly after the U.S. Supreme Court ruled (in U.S. v. Windsor) that Section 3 of the federal Defense of Marriage Act (DOMA) was unconstitutional, the IRS announced that same-sex marriages will be recognized for federal tax purposes and provided guidance relating to the impact of Windsor on certain types of employee benefits. At the same time, the IRS left a number of issues open for future guidance for qualified retirement plans.
Last week, the IRS issued Notice 2014-19, clarifying the application of Windsor to qualified retirement plans. This guidance specifically addresses issues concerning the effective date and retroactive effect of the decision as well as the timing of relevant plan amendments. The IRS also published six Frequently Asked Questions (FAQs) that address details such as beneficiary designations in profit-sharing plans, the applicability of choice of law provisions in qualified plans, the application of Windsor to Code Section 403(b) plans, and additional guidance relating to plan amendments.
In the Notice, the IRS clarified that any retirement plan qualification rule that applies to married participants must be applied equally with respect to a participant who is legally married to an individual of the same sex. As examples, the Notice identified the spousal consent requirements applicable to joint and survivor pensions (Code Section 401(a)(11)), the alternatives available to spouses under the minimum distribution rules (Code Section 401(a)(9)) and rollover rules (Code Section 402(c)), the ESOP rules pertaining to spouses, and the exception to the anti-alienation rule for qualified domestic relations orders (QDROs) (Code Section 401(a)(13)).
Effective Date and Retroactivity
The IRS reiterated its prior position that qualified plans are required to operate in compliance with Windsor as of the date of the Supreme Court’s decision (June 26, 2013), and further indicated that qualified plans will not be treated as failing to satisfy the Code Section 401(a) qualification requirements for not recognizing same-sex spouses prior to that date. Accordingly, for example, as of June 26, 2013, a qualified retirement plan had to obtain a same-sex spouse’s consent to a participant’s rejection of a qualified joint and survivor annuity form of benefit payment. The related FAQs published by the IRS expand on this issue, stating that if a plan is retroactively amended to apply the spousal consent rules to same-sex spouses as of June 26, 2013, a plan may obtain spousal consent (to remedy a prior lack of spousal consent) using the principles described in the Employee Plans Compliance Resolution System (specifically, section 6.04(1) of Rev. Proc. 2013-12, which states that the plan may either obtain the consent or have the participant repay the excess benefits and receive a joint and survivor benefit going forward).
In recognition of the fact that Windsor left open the issue of whether a couple must actually reside in a state where same-sex marriage is legal to be recognized by the federal government as married, the Notice clarified that, from the date of the Windsor decision until September 16, 2013 (the date of clarification in IRS Notice 2013-17), a plan will not be treated as failing to meet the plan qualification requirements merely because the plan followed a “residency” rule (i.e., only recognizing same sex marriages if the couple lives in a state where the marriage was permitted). This is good news for plan sponsors that may have operated in that manner during the period of uncertainty following Windsor.
With regard to periods before June 26, 2013, the IRS view is that a plan may recognize same-sex marriages for some or all purposes, provided that the plan amendment to do so complies with all applicable plan qualification requirements. As an example, the IRS noted that a plan sponsor may choose to amend its plan in a manner that apples Windsor solely with respect to the joint and survivor requirements and solely with respect to participants whose benefit commencement dates or deaths occur as of a certain date. (This ability to partially amend the plan to be consistent with Windsor will be helpful in avoiding unintended consequences of a broader amendment.) The IRS made it clear that, with respect to a decision to apply Windsor before June 26, 2013, a plan must be amended to specify the effective date and the specific rules that will be applied to same-sex spouses.
Required Plan Amendments
The Notice provides that only some plans (not all) must be amended to comply with Windsor. It explained that, where the plan terms are inconsistent with the Court’s decision and the IRS guidance, the plan must be amended. For example, a plan would have to be amended if it defines marriage by reference to Section 3 of DOMA or specifies that marriage is between two individuals of the opposite sex. However, a plan that uses the term “spouse,” “legally married spouse” or “spouse under Federal law” without distinguishing between same-sex and opposite-sex spouses should not require an amendment (though a clarifying amendment is permitted and may be helpful to plan administrators).
In terms of the deadline for making the applicable plan amendments, the amendment must be adopted by the later of December 31, 2014 or the otherwise applicable deadline under Section 5.05 of Rev. Proc. 2007-44 (i.e., by the later of the end of the plan year in which the change is first effective or the due date of the employer’s tax return for the tax year that includes the date the change is first effective).
The IRS also made it clear that an amendment to a single employer defined benefit plan implementing Windsor as of June 26, 2013 is not treated as an amendment to which Section 436(c) of the Code applies (i.e., it is not treated as an amendment that increases plan liabilities such that it cannot take effect unless the adjusted funding target attainment percentage is sufficient or the employer makes an additional contribution to the plan). However, an optional amendment to apply Windsor for a period before June 26, 2013 is treated as an amendment to which Code Section 436(c) applies. The FAQs add a similar rule applicable to multiemployer defined benefit plans subject to Code Section 432 (which restricts benefit increases under certain circumstances).
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This new IRS guidance answers many of the questions that have confronted qualified retirement plan sponsors in the aftermath of Windsor, and provides ample time to make the appropriate plan amendments, if plan sponsors have not already done so. Moreover, the June 26, 2013 effective date puts to rest many concerns regarding the potential retroactivity of the decision for qualified retirement plan purposes. However, it is important to note that the IRS guidance relates solely to a plan’s status as a qualified plan under the Code and, thus, it will not necessarily discourage individuals from making claims under ERISA seeking benefits and/or clarifying rights applicable to periods prior to June 26, 2013.