Author, Laura Westfall, New York, +1 212 556 2263, firstname.lastname@example.org
The Internal Revenue Service (IRS) recently issued Notice 2014-19 and related answers to FAQs, which give plan sponsors additional guidance on how the Supreme Court's decision last June in U.S. v. Windsor applies retroactively to qualified retirement plans. In light of the new guidance, plan sponsors must determine whether their qualified retirement plans need to be amended to comply with tax qualification rules, and how best to draft and adopt any such amendments prior to the amendment deadline.
In Windsor, the Supreme Court held that Section 3 of the federal Defense of Marriage Act ("DOMA"), which precluded recognition of same-sex marriages under federal law, was unconstitutional. Notice 2014-19 further amplifies guidance provided in Revenue Ruling 2013-17, which stated that effective as of September 16, 2013, the IRS would recognize a marriage entered into by a same-sex couple for federal tax purposes, so long as the marriage was validly entered into in a state authorizing same-sex marriage (regardless of the couple's state of residence). Although the IRS provided additional guidance thereafter which further clarified Windsor's effect on health and welfare plans, the IRS had not yet explained how qualified retirement plans should apply Windsor to events occurring before Rev. Rul. 2013-17's September 16, 2013 effective date.
Windsor's Retroactive Application to Qualified Retirement Plans
Under DOMA, qualified retirement plans were not permitted to treat same-sex spouses of legally married participants as "spouses" for purposes of the Internal Revenue Code's retirement plan qualification rules affecting married couples, such as the joint and survivor annuity (QJSA) rules, qualified preretirement spousal annuity(QPSA) rules, the minimum distribution rules, spousal consent rules, and qualified domestic relations order (QDRO) rules.
INSIGHT: Both defined benefit plans (such as pension plans) and defined contribution plans (such as 401(k) plans) are subject to tax qualification rules affecting married couples, although not all such rules are applicable to all such plans. Plan sponsors should consider Windsor's impact on all of their qualified retirement plans, including their 401(k) plans.
Notice 2014-19 confirms that post-Windsor, qualified retirement plans must treat same-sex spouses the same as opposite-sex spouses for purposes of such qualification rules. However, Notice 2014-19 provides some relief from Windsor's retroactive application for purposes of such qualification rules by setting forth distinct Windsor compliance guidelines for events occurring during three different time periods: (1) the period before June 26, 2013; (2) the period between June 26, 2013 and September 16, 2013; and (3) the period on and after September 16, 2013, as outlined below.
Before June 26, 2013: Notice 2014-19 does not require qualified retirement plans to apply Windsor retroactively for purposes of the tax qualification rules for events that occurred before June 26, 2013 (the date of the Supreme Court's decision in Windsor); thus, plans are not penalized for operating in accordance with Section 3 of DOMA prior to that date (i.e., by recognizing only opposite-sex couples for purposes of the plan qualification rules relating to spouses).
INSIGHT: Notice 2014-19 provides that plan sponsors may choose to amend a qualified retirement plan to provide recognition of same-sex marriages before June 26, 2013, if they wish to do so. Further, any such amendments can be limited to certain purposes, provided that the amendments comply with applicable qualification requirements (e.g., nondiscrimination rules). For example, a plan sponsor could elect to amend their plan to apply Windsor retroactively to events that occurred prior to June 26, 2013, but do so solely for purposes of the QJSA and QPSA requirements.
Between June 26, 2013 and September 15, 2013: During this period, Windsor was effective but the IRS had not yet issued Rev. Rul. 2013-17. Notice 2014-19 states that during this period, plan operations should have conformed to Windsor, but that the IRS will still treat a plan as being in compliance, even if during this period the plan treated the same-sex spouse of a participant as a spouse only if the participant was domiciled in a state that recognized same-sex marriages.
INSIGHT: Qualified retirement plan sponsors that chose not to recognize same-sex marriages during this period while awaiting IRS guidance may need to correct plan operations that occurred during this period to protect the plan's tax-qualified status. Correction under the IRS Employee Plans Compliance Resolution System (EPCRS) may require offering new rights to affected participants, such as a new opportunity to elect a QJSA that was previously unavailable.
On and after September 16, 2013: Notice 2014-19 states that because Rev. Rul. 2013-17 became effective on September 16, 2013, on and after that date plans must treat as married participants who are in same-sex marriages that were valid where the marriage was celebrated, regardless of the domicile of the participant.
Required Plan Amendments
Notice 2014-19 states that whether a plan must be amended in light of Windsor and the subsequent IRS guidance depends upon the plan's current language relating to married participants. According to Notice 2014-19, no amendment is required if the plan can be operated in compliance with Windsor and the subsequent IRS guidance without changing its language (the IRS gives the example where the term "spouse," "legally married spouse" or "spouse under federal law" is used in the plan without any distinction between a same-sex spouse and an opposite-sex spouse). However, Notice 2014-19 suggests that, even though an amendment might not be required, a clarifying amendment in those situations might help to ensure proper plan operations going forward. Plans adopting any of the optional provisions described in Notice 2014-19 must be amended for that purpose (and should specify the time period and purposes for which recognition is extended).
INSIGHT: Plans that adopted "work-arounds" to provide same-sex spouses benefits similar to those provided to opposite-sex spouses will need to be reviewed and likely amended in light of Notice 2014-19. Further, even though amendments are only required for inconsistent terms, plan sponsors may prefer to amend the plan to provide affirmative language (e.g., spelling out a plan's choice to rely on the "state of domicile" approach during the period between June 26, 2013 and September 16, 2013).
The deadline to adopt plan amendments due to Windsor is the later of the normal amendment deadline or December 31, 2014 (for calendar year plans, the December 31, 2014 date will apply). If the plan is a governmental plan, an amendment does not need to be adopted before 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.
Outstanding Issues Remain
Unfortunately, not all of the issues plan sponsors face in determining how to apply Windsor retroactively to qualified retirement plans were adequately addressed by Notice 2014-19 and the accompanying FAQs. In addition to the issues highlighted in the "Insights" above, plan sponsors should be aware that compliance with the IRS's tax qualification guidance post-Windsor may not protect plan sponsors from litigation stemming from Windsor-based benefits claims under ERISA. Although the IRS has sole authority to issue guidance under ERISA Section 205 (which governs spousal rights in retirement plans), Notice 2014-19 does not explicitly address retroactive benefit claims under ERISA. Furthermore, although the Department of Labor stated in Technical Release No. 2013-04 that it will recognize legal same-sex marriages for purposes of ERISA, it did not specify an effective date for such recognition.
Although Notice 2014-19 does confirm that qualified retirement plans do not need to retroactively apply Windsor for periods prior to June 26, 2013, plan sponsors will still face uncertainty in determining whether (and how) to amend their plan documents and how to correct any corresponding operational mistakes. Given the complexity of these determinations and the potential consequences of Windsor's retroactive application, we would be happy to assist you in reviewing your qualified retirement plans and answering any questions that may arise during the process.