IRS Issues Guidance on Qualified Plan Amendments Regarding Same Sex Spouses

[This article also appears in our Employment and Labor Law/Employee Benefits Executive Briefing: May 2014.]

Employers have been considering the impact on benefit programs, including the qualified retirement plans, of the U.S. Supreme Court’s decision recognizing the validity of same sex marriages. In September, 2013, the IRS issued guidance about the prospective impact of the decision on qualified plans. In April, 2014, the IRS issued guidance regarding the retroactivity of the decision.

In Notice 2014-19, the IRS concluded that qualified retirement plans were not required to recognize same sex marriages before June 26, 2013, the date of the Supreme Court decision. From June 26, 2013, through September 15, 2013, plans were required to recognize same sex spouses based upon the state of residency of the plan participants. Beginning September 16, 2013, plans must recognize spouses based upon the state of celebration of the marriage.

The 2014 Notice requires employers to amend their qualified retirement plans consistent with the above requirements, to the extent that a plan references the Defense of Marriage Act (DOMA), the statute held unconstitutional in the Supreme Court decision, or to the extent that the definition of “spouse” is limited to opposite sex couples only. Plans that do not define “spouse” in a way that limits same sex spouses from being recognized do not need to be amended. In determining whether an amendment is needed, employers may need to consider the plan provisions, if any, regarding choice of law. If the choice of law provision names a state that does not recognize same sex marriages, the employer will need to take that into account in deciding whether a plan amendment defining spouses to include same sex spouses is needed. Plan amendments must be made by December 31, 2014, or if later, the usual deadline for plan amendments for non-calendar year plans.

Plans are also permitted, but not required, to recognize same sex spouses before June 26, 2013, the date of the Supreme Court’s decision. Employers who choose that approach must amend their plans to do so, even if the plan’s definition of “spouse” is otherwise consistent with recognizing same sex marriages. Employers should consider all ramifications before adopting a retroactive amendment. All distributions made during the period of retroactivity would be required to be consistent with recognizing a same sex spouse. In addition, controlled group rules, under which a spouse is considered to own business interests held by the other spouse, should also be evaluated. If a marital relationship is recognized retroactively, it may be that businesses would be considered part of a controlled group for tax and ERISA purposes, which could affect plan nondiscrimination testing and liability for plan contributions in some cases. Employers would want to consult their benefits counsel before taking such an approach.

Safe harbor 401(k) plans can be amended during a safe harbor plan year only in limited circumstances. The IRS clarified in Notice 2014-37 that amendments to conform the plan’s definition of spouse to the Supreme Court’s decision are permitted (and in some cases required), as discussed above.

For background, see our article, District Court Rules Same-Sex Spouse has Right to Pension Benefit under ERISA, in the August 2013 Executive Briefing; U.S. Supreme Court Rules on Same-Sex Marriage: What Does This Mean for Employers? in the September 2013 Executive Briefing; and Department of Labor adopts, for ERISA purposes, “State of Celebration” Rule For Same-Sex Marriages, in the October 2013 Executive Briefing.

 

Topics:  DOMA, Employee Benefits, IRS, Marriage, Qualified Health Plans, Same-Sex Marriage, SCOTUS, Tax Benefits, US v Windsor

Published In: Civil Rights Updates, Family Law Updates, Finance & Banking Updates, Labor & Employment Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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