Last week, the Internal Revenue Service (IRS) issued Notice 2015-86, providing guidance on the application of the U.S. Supreme Court’s decision in Obergefell v. Hodges to qualified retirement plans and health and welfare plans, including cafeteria plans. Importantly, and as expected, the IRS comments in the Notice that it does not anticipate that Obergefell will have a significant impact on the application of federal tax law to employee benefit plans.
By way of background, in 2013, the Supreme Court held in United States v. Windsor that Section 3 of the federal Defense of Marriage Act (defining marriage as being between opposite-sex partners for purposes of federal law) was unconstitutional, but the Court left intact the provision pursuant to which states could refuse to allow or recognize same-sex marriages. Two years later, the Court held in Obergefell that the Fourteenth Amendment’s Due Process and Equal Protection Clauses required states to allow same-sex marriage and to recognize lawful same-sex marriages performed in other states. Following the Windsor decision, the IRS issued guidance recognizing, for federal tax and employee benefits purposes, same-sex marriages performed in states permitting such marriages, and providing guidance for plan sponsors.
Qualified Retirement Plans
As expected, IRS Notice 2015-86 clarifies that, for federal tax law purposes, the Obergefell decision does not require the sponsor of a qualified retirement plan to change the terms or operation of its plan because these plans were already required to be amended (generally effective June 26, 2013) to reflect the Windsor decision and subsequent IRS guidance (i.e., recognizing same-sex spouses for federal tax purposes). However, the new Notice points out that a plan sponsor may decide to amend its plan following Obergefell to make certain optional changes or clarifications, such as to provide new rights or benefits with respect to participants who have same-sex spouses. As an example, a plan sponsor may adopt a plan amendment allowing a participant who began receiving a single life annuity prior to the date of the Windsor decision to make a new election of a qualified joint and survivor annuity with his or her same-sex spouse. The Notice also explains that a plan sponsor may still decide to amend its plan to apply Windsor (i.e., recognize same-sex spouses for plan purposes) retroactively to a period prior to the date of that decision, provided that the amendment otherwise complies with applicable plan qualification requirements.
The Notice also makes clear that, for single employer defined benefit plans that are subject to the restrictions contained in Internal Revenue Code (Code) Section 436(c) (i.e., limiting the ability to make plan amendments that increase liabilities if the plan’s adjusted funding target attainment percentage is below a certain threshold), a discretionary plan amendment expanding benefits for participants with same-sex spouses in response to Obergefell is subject to the requirements of Code Section 436(c).
The deadline to adopt discretionary amendments contemplated in the Notice is generally the end of the plan year in which the amendment is operationally effective, or in the case of a retroactive amendment described above, the end of the plan year in which the amendment is approved.
Health and Welfare Plans
Notice 2015-86 also confirms that the Obergefell decision does not require any changes to the terms of a health or welfare plan, noting that if such a plan offers benefits to same-sex spouses of participants, the federal tax treatment of such benefits already has been addressed in prior IRS guidance. Nevertheless, the Notice further explains that Obergefell could require changes to the operation of a plan depending on the plan terms. For example, if a plan offers coverage to “the spouse of a participant as defined under applicable state law,” and the plan administrator determines that applicable state law has expanded to include same-sex spouses as a result of Obergefell, then the terms of the plan would require coverage of same-sex spouses as of the date of the change in applicable state law.
Finally, the guidance clarifies the ability to permit election changes with respect to health and welfare plans that are offered through a cafeteria plan. The Notice explains that if a health or welfare plan did not permit coverage of same-sex spouses at the beginning of a plan year and the terms or operation of the plan change during the year to permit such coverage, the cafeteria plan may permit a participant to revoke an existing election and submit a new election, provided that the terms of the cafeteria plan allow a participant to make a change in coverage due to a “significant improvement in coverage” (or the plan is amended to allow such changes, as permitted by the Notice).
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Through various forms of guidance issued since the Windsor decision, the IRS and Department of Labor have provided detailed explanations regarding the impact of Windsor and Obergefell on employee benefit plans. Plan sponsors considering amending the plan to accommodate the Supreme Court decisions should consult with ERISA counsel.