On April 4, 2014, the Internal Revenue Service (the “IRS”) issued Notice 2014-19 (the “Notice”), which provides guidance regarding the application to qualified retirement plans of the U.S. Supreme Court’s decision in United States v. Windsor. This Notice supplements the IRS’s previously issued guidance in Revenue Ruling 2013-17 (the “Ruling”). In addition, the IRS has posted six Frequently Asked Questions on its website, “Answers to Frequently Asked Questions Regarding the Application of the Windsor Decision and Post-Windsor Published Guidance to Qualified Retirement Plans”.
The Notice provides that qualified retirement plans (which include defined contribution plans (like 401(k) plans) and defined benefit plans that are qualified under Internal Revenue Code Section 401(a)) must recognize individuals who are in same-sex marriages as “spouses” as of June 26, 2013 (the date of the Windsor decision). Qualified retirement plans containing provisions that conflict with the Windsor decision must be amended to change those provisions by December 31, 2014, or, if later, the due date of the employer’s tax return for the tax year that includes the amendment’s effective date. Governmental plans must be amended by 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.
Note that the Notice focuses only on the rules applicable to qualified retirement plans, and does not address the potential claims participants or their same-sex spouses may have under the Employee Retirement Income Security Act of 1974 (“ERISA”), or potential claims participants, same-sex spouses, or civil union partners may have under state law, to the extent ERISA does not apply.
In Windsor, the U.S. Supreme Court held that Section 3 of the Defense of Marriage Act (“DOMA”), which barred same-sex married couples from being recognized as “spouses” for purposes of federal law, was unconstitutional. Following the Windsor decision, on September 16, 2013, the IRS issued its Ruling, which stated that same-sex marriages legally entered into in any state that recognizes same-sex marriages would be recognized as of September 16, 2013, for federal tax purposes. That Ruling also stated that it is not the law of the state in which a same-sex married couple is domiciled, but the law of the state in which the same-sex marriage was entered into, that controls for federal tax purposes.
The Windsor decision and the Ruling raised a number of issues in the administration of certain qualified plan provisions, including beneficiary designations, hardship distributions, minimum required distributions, qualified joint and survivor annuities (“QJSA”), qualified pre-retirement survivor annuities (“QPSA”), qualified domestic relations orders, and stock ownership attribution rules, and the effective date of the changes.
What Plans Need to be Amended?
The Notice requires that qualified retirement plans containing provisions that define a marital relationship by reference to Section 3 of DOMA or are otherwise inconsistent with the Windsor decision must be amended to reflect the Windsor decision retroactive to June 26, 2013.
Generally, if a qualified retirement plan’s provisions are not inconsistent with the Windsor decision and the guidance in the Ruling and the Notice (e.g., 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), then an amendment is not required. However, the Notice observes that a clarifying amendment may nevertheless be useful for purposes of plan administration in this instance. The same deadline mentioned above would apply to such a clarifying amendment. All plan sponsors should review their qualified retirement plans at this time to determine whether an amendment is needed, and take action to ensure their plans are amended timely.
Although the Notice only refers to qualified retirement plans, the FAQs on the IRS website state that the Ruling and the Notice also generally apply to 403(b) plans. However, the deadline to amend 403(b) plans to be consistent with the Windsor decision is the end of the 403(b) remedial amendment period, rather than December 31, 2014.
May Plans be Amended to Recognize Same-Sex Spouses as of an Earlier Date?
A plan sponsor may, but is not required to, choose to amend its qualified retirement plan to recognize same-sex spouses as of a date that is earlier than June 26, 2013 (provided such an amendment complies with applicable qualification requirements). However, the Notice observes that applying the Windsor decision as of a date earlier than June 26, 2013, for all purposes under a plan may trigger requirements that are difficult to implement retroactively and may create unintended consequences. As a result, the Notice permits a plan sponsor to amend its qualified retirement plan in order to apply the Windsor decision only to specific provisions as of a date earlier than June 26, 2013. The Notice provides as an example that a plan sponsor may amend its qualified retirement plan solely with respect to the QJSA and QPSA requirements and, for those purposes, solely with respect to participants with annuity starting dates or dates of death on or after a specific date (prior to June 26).
As noted above, the Notice does not address the potential claims participants or their same-sex spouses may have under ERISA. For example, the Notice does not address whether a participant or a same-sex spouse may bring a claim arguing that same-sex spouses should be recognized as of a date earlier to the date of the Windsor decision, especially since the Notice does permit a qualified retirement plan to do so without causing it to lose its qualified status. Plan sponsors may wish to consider the risk that may be posed if they elect to amend their plans to apply the Windsor decision for certain limited purposes as of an earlier date than is required. In addition, the Notice does not address the special treatment that may be required under state laws (like Colorado) for civil union partners under governmental plans.
If an amendment to apply the Windsor decision as of a date earlier than June 26, 2013, is desired, it must specify the exact date as of which, and the specific purposes for which, the rules of the Windsor decision are applied. The same deadlines above will apply to adopt that amendment.
How Must Plans be Operated?
Regardless of when a qualified retirement plan is amended to apply the Windsor decision, operationally, a qualified retirement plan must recognize a same-sex spouse as of June 26, 2013, if the same-sex couple was legally married and resided in a state that recognized same-sex marriages. In addition, a qualified retirement plan must recognize a same-sex spouse as of September 16, 2013, if the same-sex couple is legally married, regardless of where the same-sex couple resides.
For plans that contain governing law provisions designating the application of a particular state’s laws to the plan, note that the FAQs on the IRS website indicate that if a plan’s terms designate a particular state’s laws as applying to the plan, and that state does not recognize same-sex marriage for purposes of applying state law, it is not permissible for the plan to be operated in a manner that does not recognize a participant’s same-sex spouse. In other words, operationally, the plan may not follow that state law to the extent it would be contrary to the requirements of the Windsor decision, the Ruling, and the Notice.