United States: IRS Issues Important Guidance For Employers On Application Of U.S. v. Windsor To Qualified Retirement Plans

On June 26, 2013, the Supreme Court in United States v. Windsor declared unconstitutional Section 3 of the Defense of Marriage Act ("DOMA") which defined marriage for purposes of federal law as marriage between a man and a woman. The IRS has subsequently issued guidance on the application of Windsor for federal tax purposes generally, to employment taxes, and to certain health and welfare plans. On April 4, 2014, the IRS issued Notice 2014-19 which offers important guidance on the application of Windsor to qualified retirement plans. A related set of Frequently Asked Questions clarifies that the Notice, as well as the earlier general federal tax guidance, also applies to 403(b) plans.

In this client alert, we summarize the holdings of the Notice, review the types of qualified retirement plan rules potentially affected by the federal recognition of same-sex marriage, and recommend some initial compliance steps for employers.

I. Key Holdings

The key holdings of Notice 2014-19 are that (1) the operation of qualified retirement plans must reflect the outcome of Windsor as of June 26, 2013 (the date of the Supreme Court decision) and (2) the documentary provisions of qualified retirement plans must be amended for consistency with Windsor by the later of December 31, 2014 or the applicable deadline for adopting interim amendments.

The Notice elaborates on the application of these holdings:

  • Whether a plan amendment is required will depend on the plan's terms prior to Windsor. Thus, a plan that defined "spouse" by reference to Section 3 of DOMA will probably require amendment while a plan that referred to federal law more generally may not. Even a plan that does not require formal amendment must be operated in conformity with Windsor as of June 26, 2013.
  • Provided all other applicable qualification requirements are met, a qualified retirement plan will not lose its qualified status due to an amendment to reflect the outcome of Windsor for some or all purposes as of a date prior to June 26, 2013.
  • A plan amendment for compliance with Windsor as of June 26, 2013 is not treated as an amendment for purposes of Code section 436 which can prohibit an amendment to a single-employer defined contribution plan when its funding level falls beneath specified thresholds, if the effect of such amendment is to increase the plan's liabilities. Thus, a plan requiring amendment for Windsor as of June 26, 2013 should be amended regardless of whether Code section 436 otherwise applies.

II. Plan Provisions and Operations

The Notice provides a helpful list of some specific Code rules whose documentary description and operational application are potentially affected by the federal recognition of same-sex marriage. These include, but are not limited to:

  • The requirement that many defined benefit plans and certain defined contribution plans, such as money purchase plans, provide survivor annuities as the default form of benefit absent a spousal waiver. Such plans must also obtain spousal consent before making a loan to a married participant;
  • The exemption from the survivor annuity rules described above, provided that a married participant's benefit is payable to the participant's surviving spouse upon the participant's death unless the surviving spouse consents to the designation of a different beneficiary;
  • The additional alternatives for required minimum distributions and rollovers that are available to surviving spouses but not to non-spouse beneficiaries;
  • The exception to the anti-alienation rules for the creation, assignment or recognition of a spouse's or former spouse's right to receive all or a portion of the benefits payable to a participant pursuant to a qualified domestic relations order ("QDRO"). A corresponding rule treats the spouse or former spouse of the participant as the distributee of the QDRO for various federal tax purposes;
  • The treatment of one spouse as owning shares owned by the other spouse for purposes of determining (1) whether an employee is a key employee and (2) whether corporations are members of a controlled group; and
  • The prohibition on employer securities in an ESOP being allocated or accruing for the benefit of certain spouses under specified circumstances.

III. Compliance Steps

Specific application of Notice 2014-19 to qualified retirement plans will depend on the employer sponsoring the plan, the type of plan, and its mandatory and discretionary design features. The compliance steps listed below are, therefore, general in nature and should not take the place of a more detailed review in light of an employer's particular facts.

  • Review the plan's operations since June 26, 2013 for compliance with Windsor. Identify any potential noncompliance together with options for correction.
  • Determine whether amendments to the plan's definitions of marriage, spouse, husband, and wife, as applicable, are required for compliance with Windsor. Timely amend the plan as necessary.
  • Review the plan's forms such as beneficiary, spousal waiver, and rollover forms to determine whether revisions are required.
  • Confirm that administrative practices and related procedural documents treat same-sex and opposite-sex marriages equally. Thus, consistent policies should apply regarding issues such as requiring proof of legal marriage.
  • Consult with any third-party administrators or other service providers to confirm their policies and practices with respect to applying Windsor to the plan.
  • Clarify the differences, if any, between the treatment of same-sex and opposite-sex marriages under federal law and the laws of the state(s) in which the employer does business. A marriage that is recognized for federal law purposes may not be recognized for state law purposes.
  • Review the form and operation of any nonqualified deferred compensation plans, such as SERPs, for compliance with Windsor. Although Notice 2014-19 does not address nonqualified deferred compensation plans, such plans often provide benefits linked to those provided under qualified retirement plans and incorporate by reference the definitions and other provisions of qualified retirement plans.

This client alert is focused on recent IRS guidance regarding the application of Windsor to qualified retirement plans and 403(b) plans. We previously discussed other aspects of Windsor in our June 2013 client alert DOMA Ruling Affects Employee Benefits and our September 2013 client alert IRS Guidance Requires Recognition of Same-Sex Marriage for Employee Benefits.

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.

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Ronald G. Cluett
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