United States: IRS Issues Additional Post-Windsor Guidance For Qualified Retirement Plans

Last Updated: May 8 2014
Article by Sally Doubet-King and Katie M. Rak

The Internal Revenue Service (IRS) recently issued Notice 2014-19 (Plan Notice), and related Q&As, which provide additional guidance regarding the impact on qualified retirement plans of the Supreme Court's decision in United States v. Windsor, 133 S. Ct. 2675 (2013), that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional.

Earlier IRS guidance addressed the status of same-sex couples for federal tax purposes (Revenue Ruling 2013-17 and related FAQs) and answered technical issues relating to administration of benefits for same-sex spouses under cafeteria plans (Notice 2014-1). The prior guidance provided answers for most issues relating to health and welfare plans, such as employer-sponsored group health plans. The Plan Notice provides the guidelines for plan sponsors to administer benefits for same-sex spouses under qualified retirement plans.

Background

Section 3 of DOMA, which was signed into law in 1996, provided that for all federal law purposes, marriage was defined strictly as a legal union between one man and one woman. The application of DOMA to federal employee benefit laws meant that, under federal law, the term "spouse" did not include a same-sex spouse. As a result of the holding in Windsor that Section 3 of DOMA was unconstitutional, same-sex marriages that are recognized under state or foreign law must be recognized for federal law purposes, including federal law applicable to employee benefit plans. See our prior article on the Windsor decision.

The IRS issued its first post-Windsor guidance in Revenue Ruling 2013-17 and related FAQs. The IRS ruled that for federal tax purposes, meaning the Internal Revenue Code (Code), the resolution of who is a spouse would be determined by whether the marriage was valid in the state or foreign jurisdiction where it was celebrated. Accordingly, the law of the current state of residence of either party to the marriage is disregarded. This has been referred to as the "place-of-celebration" rule. The Department of Labor (DOL) issued concurrent guidance, Technical Release 2013-04, requiring the application of the place-of-celebration rule for purposes of the Employee Retirement Income Security Act (ERISA). Therefore, for all employee benefit plans governed under federal law, the determination of whether the marriage of a plan participant is valid is now determined by the place-of-celebration rule.

The IRS also ruled that a domestic partner or civil union partner would not be recognized as a "spouse" for federal tax purposes. Therefore, the same tax rules that were in effect prior to Windsor will apply to domestic partners and to those in a civil union. This could result in a distinction among states regarding how employees in civil unions will be treated as compared to those in same-sex marriages.

New Guidance for Qualified Retirement Plans

The Plan Notice covers the effect of Windsor on two very important issues relating to qualified retirement plans:

  • Operational compliance with the holding in Windsor, including retroactivity issues; and
  • The need for plan amendments to comply with Windsor and changes in plan administration that result from those amendments.

Operational Compliance with Windsor

The Plan Notice provides guidance only for qualified retirement plans. As we reported in a previous article, the IRS guidance issued in 2013 covered most issues relating to the design and operation of health and welfare plans.

One significant difference between the 2013 guidance and the Plan Notice is that the changes relating to health and welfare plans are permissive in nature; employers are not required to cover spouses and technically are not required to cover same-sex spouses even in plans where opposite-sex spouses are otherwise covered. This position has been affirmed by both the IRS and the DOL, although they concur with the general response of practitioners that splitting coverage in this manner could raise other legal challenges, such as discrimination in the provision of benefits. The effective date for changes to health and welfare plans is a matter of the plan sponsor's choice, subject to such legal challenges. By contrast, qualified retirement plans must comply with the spousal requirements for any legally-married participant, whether the union was same-sex or opposite-sex, as of one of two dates in 2013.

Under the Plan Notice, there are two important dates for operational compliance with this post-Windsor guidance that apply to all tax-qualified retirement plans. The first date is June 26, 2013, which is the date the Windsor decision was announced by the Supreme Court. The second date is September 16, 2013, the effective date of Revenue Ruling 2013-17, which gave us the place-of-celebration rule. The time period between June 26, 2013, and September 16, 2013, is referred to as a "transitional period." The transitional period can be used by plan sponsors that operate in states that did not or may still not recognize same-sex marriage; participants covered by retirement plans in those states can defer compliance with the place-of-celebration rule until September 16, 2013. After September 16, 2013, the place-of-celebration rule applies for all employee benefits governed by the Code or ERISA.

Records need to be available in whatever system the plan sponsor uses to hold and track participant data and must be coordinated with these effective dates. Even if a plan can technically avail itself of the transition period, it may be easier for administrative purposes to use June 26, 2013 to track the legal marriages of all plan participants.

Accordingly, effective June 26, 2013 (or if applicable, September 16, 2013), a qualified retirement plan must treat same-sex spouses as spouses for all plan purposes. For example, a same-sex spouse will be the surviving spouse for death-benefit purposes under the plan. Therefore, consent must be obtained from a same-sex spouse in order to waive a qualified joint and survivor annuity (QJSA) or a qualified preretirement survivor annuity (QPSA) in a plan that offers those benefits.

Retroactive Application of Windsor Guidance

As with prior Windsor guidance, there is no mandatory retroactive effective date prescribed in the Plan Notice relating to qualified retirement plans. Before June 26, 2013 (or if applicable, September 16, 2013), same-sex spouses would not be required to be treated as spouses under the plan. For example, no QJSAs or QPSAs, or consent and notice of these requirements, would apply to same-sex spouses for those time periods. The Plan Notice, however, allows plans to consider making certain retroactive amendments to qualified retirement plans for periods prior to June 26, 2013 and still maintain qualified status. In practical terms, accomplishing retroactive application may be difficult or even impossible. A plan amendment that would change plan operations for a time period prior to June 26, 2013 would, at the very least, have the following compliance hurdles:

  • The Code Section 401(a)(4) nondiscrimination rules;
  • For defined benefit plans, the funding rules under Code Section 436;
  • Other Code requirements in operation during the retroactive period; and
  • Avoidance of unintended consequences or deficiencies in plan operation relating to the retroactive application of the amendment.

If retroactive application is important for specific qualified retirement plans because of particular plan demographics or employee relations concerns, then the plan sponsor must review the impact of any retroactive amendments carefully. Retroactive amendments represent the kind of changes that should only be made to a qualified plan based on careful consideration of what the impact will be and what problems may arise.

This process regarding assessment of retroactive amendments may be less complicated for defined contribution plans that are not subject to the QJSA and QPSA requirements (for example, 401(k) plans that do not offer annuity-type benefits). Such plans, however, do require that the automatic beneficiary of a participant's account be his or her spouse unless the spouse otherwise consents. Thus, plan sponsors should proceed with caution even as to these plans.

Any retroactive amendments made to a qualified retirement plan will raise issues regarding operational compliance during the period covered by the retroactive amendment. Most often, compliance will require corrections similar to those suggested under the IRS Employee Plan Compliance Resolution System (EPCRS).

For example, on or after June 26, 2013 (or if applicable, September 16, 2013), spousal benefits must be offered to any same-sex spouse. Because the guidance in the Plan Notice was only recently issued, this means that a plan administrator may have to make some adjustments for elections or spousal consents from 2013. Pursuant to the Plan Notice, however, these adjustments can be made by the plan administrator without concerns about retroactive application or EPCRS corrections.

If instead a plan amendment extends the availability of the QJSA to same-sex spouses for a period prior to June 26, 2013, the Plan Notice does not offer this "automatic" protection for the corresponding operational adjustments. As a result, operational issues such as the notice and consent requirements relating to that retroactive period must follow the EPCRS principles as to how to handle the correction when the annuity starting date has already passed.

For most employers, the number of participants affected by the changes made in accordance with Windsor guidance will be small. Therefore, part of the analysis of whether to implement retroactive application of any spousal provisions for same-sex spouses should include consideration of the cost of undertaking retroactive compliance for a very limited group of participants.

Plan Amendments for Windsor Compliance

There are generally three categories of retirement plan provisions to be reviewed for post-Windsor compliance:

  • Plans that have provisions that must be amended because the plan language is inconsistent with Windsor;
  • Plans that do not need to be amended because the language already conforms or is neutral enough to conform with the post-Windsor guidance; and
  • Plans that have provisions that technically do not require amendments because they comply with the post-Windsor guidance as written, although the plan sponsor may wish to clarify or otherwise update the language to ensure operational compliance with such guidance.

For example, if the term "spouse" is defined under a retirement plan in relation to or citing DOMA as a husband and wife of the opposite sex, or a marriage that is legal in the state of the participant's domicile, then the plan language must be amended to be consistent with post-Windsor guidance. If, however, the definition of "spouse" is consistent with federal law (such as defining "spouse" to mean the legal spouse of the participant), when federal law changed with the Windsor decision and subsequent guidance, then the interpretation under the plan provisions changed as well.

As with the operational provisions discussed previously, the plan should be reviewed to determine what, if any, other provisions might need to be amended. The provisions regarding optional forms of benefits, death benefits, spousal consent, beneficiary designation and spousal rollover provisions are just a few of the plan provisions that might require changing or updating post-Windsor.

Under the Plan Notice, an amendment to conform a private-sector plan to the Windsor holding must be adopted by the latest of (i) the last day of the plan year in which the amendment is first effective; (ii) the due date of the employer's tax return for the tax year that includes the date that the amendment is first effective; or (iii) December 31, 2014. This deadline applies not only to amendments that would apply the guidance in the Plan Notice effective June 26, 2013 (or, if applicable, effective September 16, 2013), but also to amendments that would apply such guidance to a period before June 26, 2013. Thus, for a calendar-year plan sponsored by an employer with a calendar taxable year, the deadline will be December 31, 2014. (An amendment to a governmental plan pursuant to the Plan Notice need not be adopted by the legislative body with the authority to amend the plan, before the close of the first regular legislative session that ends after December 31, 2014.)

We suggest, however, that even when the amendment deadline is after the end of 2014, the plan sponsor should consider making amendments by year-end for two reasons:

  • The plan must comply in operation immediately; therefore, it generally is best for operation and documentation to be consistent so as to avoid confusion and costly operational defects.
  • There is a possibility that waiting to do the amendments would result in forgetting to do the amendments, and then the plan could be out of compliance.

Certain Plans May Not Require Amendment

There may be many retirement plans that require no amendments to conform to Windsor and post-Windsor guidance. We have mentioned that plans with neutral language, for example, where spouse is defined by reference to federal law only, may not require amendment. If the plan refers to legal marriage under state law and previously has been interpreted to follow DOMA, a clarifying amendment may be helpful. An alternative would be to adopt an administrative interpretation or guideline to clarify the new operation under the plan. For example, if the plan has been interpreted in the past to consider marriage based on something other than the place of the celebration (such as the state of residence or the state of employment), then a clarifying amendment to include marriage as being determined by the place of the celebration could prevent internal confusion regarding which state law applies in evaluating relationship status. This type of clarifying amendment also could be helpful for resolving ambiguity when the plan is submitted for an updated determination letter filing.

A plan may refer to the "spouse" without defining this term. A plan amendment is not necessary in such a case to comply with Windsor and the Plan Notice. However, for use by personnel who answer participant inquiries or otherwise handle plan operations, the plan administrator may want to provide written guidance for determining who should be considered a spouse.

Existing Plan Provisions for Individuals in Domestic Partnerships or Civil Unions

Prior to the Windsor decision, some retirement plans included provisions creating spouse-like benefits for individuals in domestic partnerships or civil unions that generally would include same-sex spouses. Depending on the specific plan language, these definitions may need to be updated during the amendment process because same-sex spouses will now be covered under the plan's definition of "spouse." This also may be the time to evaluate whether the benefits provided to these groups (domestic partners or civil union partners) should remain the same following Windsor.

Where a plan has recognized groups such as domestic partners or civil union partners, the plan sponsor must be careful to consider any potential cutback issues when making these decisions. For example, the plan sponsor may determine that participants with domestic partners or civil union partners will be grandfathered as of the date of the Windsor decision and that other same-sex marriages will be recognized prospectively.

Implementation of Windsor Amendments

In addition to plan amendments, plan sponsors also should consider changes to other plan documentation:

  • The summary plan descriptions may need to be revised, as they are an important source of information for participants, especially for significant changes.
  • Various plan forms also should be reviewed. A beneficiary designation form may, for example, just reference "spouse," but the context should be checked carefully to ensure that the form still applies when the form will be used for any legal marriage, not just opposite-sex marriages. Before Windsor, a participant with a same-sex spouse did not need spousal consent to name a different beneficiary (unless required by the terms of the plan). Under post- Windsor plan administration, that beneficiary designation generally will be preempted by the recognition of the same-sex spouse unless a valid spousal consent is given during a time period after June 26, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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