IRS Releases Guidance on Application of Windsor to Retirement Plans

by Parker Poe Adams & Bernstein LLP
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Last week, the IRS released Notice 2014-19, which provides guidance on the application to retirement plans of the Supreme Court’s decision in United States v. Windsor, which found Section 3 of the Defense of Marriage Act unconstitutional. This week the IRS published FAQs expanding on that guidance. The Windsor decision is generally effective on June 26, 2013, but an employer may choose to apply it for earlier periods. Shortly after the decision, the IRS held for federal tax purposes, the terms “spouse,” “husband,” “wife” and similar terms include an individual married under state law to a person of the same sex, and that a same-sex marriage that was validly entered into in a state whose laws authorize the marriage is recognized even if the couple lives in a different state.

Because the IRS holding applies for all federal tax purposes, any rule that applies based on a participant’s marital status must be applied with respect to a participant who is married to an individual of the same sex. These rules include the following:

  • Qualified joint and survivor annuity (“QJSA”) requirements applicable to defined benefit plans and some defined contribution plans, which require spouse consent to waiver of a QJSA and to certain participant loans. A participant in a defined contribution plan that does not provide for annuities generally must obtain spouse consent to name a non-spouse beneficiary for his or her account. For example, if a 401(k) plan participant who is married to a same-sex spouse dies on or after June 26, 2013, death benefits must be paid to the participant’s spouse regardless of any conflicting plan terms or any prior beneficiary designation to which the spouse did not consent.
  • Eligibility for certain hardship withdrawals.Minimum distribution alternatives available to surviving spouses that are not available to non-spouse beneficiaries.
  • Assignment of a portion of a participant’s benefits to an alternate payee who is a spouse or former spouse under a qualified domestic relations order (QDRO).
  • Ownership attribution rules for purposes of determining whether corporations are members of a controlled group or affiliated service group and for identifying key employees.
  • ESOP rules that prohibit allocation of securities under certain circumstances.

Some retirement plans define the term “spouse” to exclude same-sex spouses. Under the recent guidance, all retirement plans must recognize same-sex spouses for the above purposes effective June 26, 2013. However, a plan will not be disqualified for periods before September 16, 2013 if it limits such recognition to the same-sex spouse of a participant who lived in a state that recognized same-sex marriage (the “state of celebration” rule). An employer also may choose to apply any of the above rules for periods before June 26, 2013 by amending its plan to specify an earlier effective date by the same deadline. For example, an employer may choose to apply the rules only for purposes of spousal consent. Any amendment for periods before June 26, 2013 must be nondiscriminatory and may not be made to a plan that is subject to funding-based restrictions.

The deadline for amending qualified plans generally is December 31, 2014. Even where an amendment is not required, it may be desirable to clarify how a plan will operate; for example, if it will use the state of celebration rule before September 16, 2013. While the Notice also applies to 403(b) plans, the deadline for amendment will be announced in subsequent guidance with respect to pre-approved 403(b) plans.

Employers should determine whether amendments to their plans are required and whether retroactive amendments for periods before June 26, 2013 are desirable, and should amend their plans by the applicable deadline.

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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