The IRS Sets Rules for Plan Sponsors to Implement 'Windsor' with Respect to Qualified Retirement Plans
Introduction
After months of receiving “wait and see” advice from attorneys and other tax practitioners, retirement plan sponsors finally have formal guidance with respect to the Supreme Court’s landmark ruling in U.S. v. Windsor recognizing same-sex marriage for Federal law purposes. Last week, the Internal Revenue Service (IRS) published Notice 2014-19 (the “Notice”), the second such pronouncement, which provides guidance on how qualified retirement plans can comply with Windsor. Still to come is guidance on other types of employee benefit plans.
Background
Prior to the Windsor decision on June 26, 2013, the Defense of Marriage Act (DOMA) prohibited the recognition of same-sex spouses for purposes of Federal law. Windsor held that the provisions of DOMA that limited “marriage” to only a “union between a man and a woman,” and the definition of “spouse” to “a person of the opposite sex who is a husband or a wife,” were unconstitutional.
Many questions remained after Windsor. In Revenue Ruling 2013-17, the IRS ruled that, on and after September 16, 2013, same-sex married couples should be recognized as legally married for Federal tax purposes, regardless of where they live, so long as they were married in a jurisdiction (domestic or foreign) that recognizes same-sex marriages. That ruling, however, did not address how Windsor affected the Federal tax aspects of qualified retirement plans.
Some of the issues that are affected by the definition of “spouse” include, but are not limited to, the joint and survivor and pre-retirement survivor annuity rules, spousal consent procedures, direct rollovers, after-death required minimum distributions, hardship distributions, Section 415(b) limits for subsidized qualified joint and survivor annuities, early withdrawal penalties, QDRO processing and certain stock ownership attribution rules affecting controlled group classifications, “key employee” determinations and employee stock ownership plans.
What’s in Notice 2014-19
- General Application. The Notice established four general principles with respect to any retirement plan qualification rule that applies because a participant is married:
- A qualified retirement plan must recognize the same-sex spouse of a participant as the participant’s spouse on and after June 26, 2013 (the date of the Windsor decision) if the participant is domiciled in a state
that recognizes same-sex marriages.
- A qualified retirement plan must recognize the same-sex spouse of a participant as the participant’s spouse on and after September 16, 2013 (the date specified previously in Revenue Ruling 2013-17) if the participant is
domiciled in a state that does not recognize same-sex marriages (although the plan may recognize the same-sex spouse of such a participant on and after June 26, 2013).
- A qualified retirement plan will not be disqualified merely because it did not recognize the same-sex spouse of a participant as the participant’s spouse before June 26, 2013.
- A qualified retirement plan will not be treated as failing to meet qualification requirements if the plan elects to implement Windsor for some or all purposes prior to June 26, 2013, so long as the amendment of the plan to implement such treatment otherwise satisfies the qualification rules (see the “Permissive Amendment” section below).
- A qualified retirement plan must recognize the same-sex spouse of a participant as the participant’s spouse on and after June 26, 2013 (the date of the Windsor decision) if the participant is domiciled in a state
that recognizes same-sex marriages.
- Written Amendment. Whether a qualified retirement plan is required to be amended as a result of Windsor depends on the terms of the plan. An amendment to the plan is not required if the plan’s terms
and operation are consistent with Windsor and Revenue Ruling 2014-19 – for example, the plan uses the terms “spouse,” “legally married spouse” or “spouse under Federal law”
without any distinction between a same-sex spouse and an opposite-sex spouse. Conversely, an amendment to the plan is required if the plan’s terms are inconsistent with Windsor and/or Revenue Ruling 2014-19 –
for example, the plan defines marriage by reference to Section 3 of DOMA or spouse as solely a member of the opposite sex.
Generally, the deadline to amend the plan is December 31, 2014 (with limited exceptions). A governmental plan has until 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, to comply.
- Permissive Amendment. A qualified retirement plan must be amended if the plan sponsor elects to apply Windsor prior to June 26, 2013. Although the Notice authorizes such action, plan sponsors should exercise caution against “blanket” amendments recognizing same-sex spouses for all purposes as there may be unintended and unforeseeable consequences. Any amendment to recognize same-sex marriages prior to June 26, 2013, should specify the provisions to which it applies (e.g., the joint and survivor annuity rules) and the applicable effective date.
- Special Rule for Underfunded Defined Benefit Plans. Underfunded defined benefit plans are generally restricted from adopting amendments that increase the liabilities of the plan. This restriction will not apply to any amendment of the plan implementing Windsor on and after June 26, 2013.
What Should be Done Now
Every sponsor of a qualified retirement plan (including pension, 401(k), ESOP, money purchase and profit sharing plans) should:
- Review the terms of its plan to determine whether the plan must be amended because it defines marriage by reference to Section 3 of DOMA or defines spouse as limited to an opposite-sex spouse, and, if so, amend the plan by the deadline
imposed by the Notice.
- Confirm whether the plan has been operated since June 26, 2013, to recognize the same-sex spouse of a participant if such participant was domiciled in a state that recognizes same-sex marriage, or since September 16, 2013, to recognize
the same-sex spouse of a participant regardless of where the participant is domiciled. If not, the plan would have operational failures, which could adversely affect the plan’s qualified status if not timely remedied. Moreover,
same-sex spouses who were denied benefits to which they were entitled may have claims against the plan notwithstanding the fact that the intended benefits were distributed to other beneficiaries.
- Revise administrative forms and policies to recognize same-sex spouses, such as rollover notices, QJSA and QPSA notices, etc.
- Determine if appropriate waivers were obtained from same-sex spouses if benefits were paid after June 26, 2013, to anyone other than the participant’s same-sex spouse.
Contact your Troutman Sanders employee benefits lawyer if you need further assistance with any of the above.
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