The Treasury Department and Internal Revenue Service (“IRS”) have issued Notice 2014-9 (the “Notice”) and related Frequently Asked Questions (“FAQs”) providing much anticipated guidance on the application of the Supreme Court’s decision in U.S. v. Windsor and Revenue Ruling 2013-17 to qualified retirement plans. Employers will need to take action this year to ensure that plan documents and operations are consistent with the new guidance.
On June 26, 2013, the Supreme Court’s landmark decision in Windsor invalidated a key provision of the 1996 Defense of Marriage Act that excluded a same-sex partner from the definition of spouse for purposes of federal law. Under the ruling, same-sex couples are to be treated as married for all federal tax purposes. Following the Windsor decision, the IRS issued Revenue Ruling 2013-17, which holds that married same-sex couples are to be treated as married for all federal tax purposes where marriage is a factor, if the couple is lawfully married under the laws of one of the 50 states, the District of Columbia, a U.S. territory, or a foreign jurisdiction. Revenue Ruling 2013-17 applied prospectively beginning September 16, 2013, but did not offer any guidance as to the potential retroactive application of Windsor.
The Notice applies to retirement plans that are qualified under Internal Revenue Code (“Code”) Section 401(a), including 401(k) plans, profit-sharing plans, and defined benefit pension plans. The new guidance relates to the rules regarding several important rights of participants’ spouses under such plans, including with respect to qualified joint and survivor annuities, qualified preretirement survivor annuities, spousal consent to designation of a non-spouse beneficiary, required minimum distributions, and qualified domestic relations orders. In general, the Notice affirms that same-sex couples who are legally married under applicable state law without regard to the spouses’ state of residence must be treated in operation as married for these and other purposes under qualified plans. The FAQs further clarify that the Notice applies to 403(b) plans.
Retroactive Application Not Required
In a welcome development, under the Notice, a retirement plan will not be treated as failing to meet the qualification requirements under the Code because it did not treat the same-sex spouse of a participant as a spouse for the purposes described above and otherwise before June 26, 2013. On the other hand, a plan will not lose its qualified status if it is amended to reflect Windsor for some or all purposes as of a date prior to June 26, 2013.
Whether a qualified retirement plan must be amended to reflect the outcome of Windsor depends on the terms of the specific plan. A plan that is consistent with Windsor will generally not have to be amended. If a plan’s terms with respect to the requirements of Code Section 401(a) define a marital relationship in a manner that is inconsistent with Windsor (usually, either by including in the definition of “spouse” that he or she must be an individual of the opposite sex or by reference to applicable law in the participant’s state of residence, as opposed to the law of the state of celebration), the plan must be amended to reflect the outcome of Windsor. Additionally, if a plan sponsor chooses to apply some or all rules in a manner consistent with Windsor prior to June 26, 2013, an amendment is required that specifies the purposes and the effective dates.
With respect to defined benefit plans, the Notice and FAQs clarify that an amendment to reflect the outcome of Windsor, effective June 26, 2013, is not treated as an amendment to which certain technical restrictions on increasing plan liabilities apply. However, an amendment reflecting the outcome of Windsor prior to June 26, 2013, is an amendment subject to restrictions on increasing plan liabilities.
Timing of Amendments
Amendments to conform the terms of a plan to the outcome of Windsor or to apply the outcome of Windsor prior to June 26, 2013, must generally be adopted by the later of December 31, 2014, or the otherwise applicable deadline under section 5.05 of Revenue Procedure 2007-44 (which generally requires an interim amendment to be adopted by the later of the plan year in which the change is first effective or the due date of the employer’s tax return for the tax year that includes the date the change is first effective). A required amendment to a governmental plan need not be adopted before the close of the first regular session of the legislative body with the authority to amend the plan that ends after December 31, 2014. A required amendment to a 403(b) plan must be adopted by the yet-to-be announced deadline for the adoption of plan documents that satisfy the written plan requirement under the final 403(b) regulations.