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On April 4, 2014, the Internal Revenue Service (IRS) released Notice 2014-19, which provides a series of Q&As regarding the application of the U.S. Supreme Court’s decision in United States v. Windsor and the IRS’s prior guidance in Revenue Ruling 2013-17 to qualified retirement plans. On the same day, the IRS posted additional, related Q&As on its website. The new guidance provides that qualified retirement plans must recognize same-sex spouses as of June 26, 2013, the date of the Windsor decision, while plans may, but are not required to, recognize same-sex spouses before that date. The Notice also clarifies when plan amendments may be required.
Background
The Windsor decision invalidated, on equal protection grounds, the Defense of Marriage Act (DOMA) which limited marriage to opposite-sex couples for purposes of federal law. Following the decision, the IRS issued Revenue Ruling 2013-17, which held that same-sex marriages legally entered into in any state that recognizes such marriages would be recognized for federal tax purposes as of September 16, 2013, the date of the Ruling. The Ruling also held that the law of the state in which a same-sex couple entered into their marriage, and not the state of their domicile, would control for federal tax purposes. Please click here to see our prior Legal Alerts on the Windsor decision, the Ruling, and the Department of Labor’s guidance on same-sex spouses to date.
The Windsor decision and Revenue Ruling 2013-17 had a significant impact on numerous aspects of qualified retirement plans, including:
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Benefit or Provision Impacted
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Impact of Windsor and the Ruling
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Qualified Joint and Survivor Annuities (QJSAs)
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Same-sex spouses are “spouses” for purposes of determining the right to and calculating the QJSA benefit
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Spousal consent rights, including for plan loans, apply to same-sex spouses
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A same-sex spouse’s survivor annuity under a QJSA is not taken into account when determining maximum benefits under IRC § 415(b)
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Qualified Pre-Retirement Survivor Annuities (QPSAs)
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Same-sex spouses are considered “spouses” for purposes of determining the right to and the calculation of the QPSA benefit and other spousal death benefits
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Beneficiary Designations
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Default spousal designations apply to same-sex spouses
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Minimum Required Distributions
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Spousal deferral rules that apply to death benefits apply to same-sex spouses under IRC § 401(a)(9)
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Hardship Distributions
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Plans that provide for hardship distributions for payment of a spouse’s medical bills, tuition, or funeral expenses must allow hardship distributions for such expenses for same-sex spouses
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Qualified Domestic Relations Orders (QDROs)
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Plans are required to honor QDROs that assign benefits to a same-sex spouse
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Stock Attribution Rules
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A same-sex spouse is treated as owning shares owned by the other spouse for purposes of determining whether corporations are members of a controlled group under IRC § 414(b)
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A same-sex spouse is treated as owning shares owned by the other spouse for purposes of determining whether an employee is a key employee under IRC § 416(i)
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Employee Stock Ownership Plans (ESOPs)
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A same-sex spouse is treated as a “spouse” for purposes of applying allocation and accrual limits under IRC § 409
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The Ruling also noted that the IRS would issue additional guidance on how Windsor and the Ruling apply to qualified retirement plans, including whether their impact must be (or may be) applied retroactively.
Retroactive Effect
As noted above, Notice 2014-19 says that qualified retirement plans must recognize same-sex spouses as of the date of the Windsor decision (June 26, 2013); however, plans will not be disqualified for failing to recognize same-sex spouses before that date. Operationally, qualified retirement plans must:
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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; and
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Recognize a same-sex spouse as of September 16, 2013, if the same-sex couple is legally married, regardless of where they reside.
If a qualified retirement plan failed to recognize same-sex spouses for any purpose as of the dates set forth above, additional Q&As on the IRS website suggest that employers should address this issue using the correction principles available under the Employee Plans Compliance Resolution System (EPCRS).
The Notice also provides that qualified retirement plans may choose to recognize same-sex spouses before June 26, 2013, although the IRS noted that this may be difficult to administer and may trigger unintended consequences. As a result, a plan is free to recognize same-sex spouses before June 26, 2013, for certain purposes, but not others. For example, a plan may choose to recognize same-sex spouses solely with respect to the QJSA and QPSA rules before June 26, 2103, and solely with respect to annuity starting dates or dates of death on or after a certain date. The Q&As posted on the IRS website indicate that the principles of EPCRS should be used to implement any corrections needed in connection with such a retroactive amendment.
Required Plan Amendments
The Notice states that plan amendments are only required if the plan’s terms are inconsistent with the Windsor decision. For example, a plan that defines a marital relationship by reference to DOMA requires an amendment, while a plan that defines a marital relationship by reference to “any legally married spouse” does not. Additionally, if a plan wishes to recognize same-sex spouses before June 26, 2013, an amendment is required.
Regardless of plan language, the Notice states that a clarifying amendment may be useful for purposes of plan administration. Plans generally must be amended 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.
403(b) Plans
Although the Notice only refers to qualified plans, the additional Q&As on the IRS website note that the Notice is generally applicable to 403(b) plans. Different amendment deadlines, however, apply to 403(b) plans, which must be amended by the end of the 403(b) remedial amendment period.
Governing Law Provisions
The Q&As posted on the IRS website clarify that a plan that includes a governing law provision or similar provision that says it will follow the law of a specified state may not follow that state law to the extent it would be contrary to the requirements in the Ruling and the Notice.
Open Issues
The Notice focuses solely on the tax qualification rules of IRC § 401(a), and does not address any claims participants or their same-sex spouses may have under the Employee Retirement Income Security Act of 1974 (ERISA). For example, the Notice does not address whether a participant or a same-sex spouse may argue that same-sex spouses should have been recognized prior to the Windsor decision, especially since the Notice explicitly permits a plan to do so without adversely affecting its tax qualified status.
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