compliance alert

May 1, 2014

Qualified Retirement Plans Required to Apply United States v. Windsor Prospectively from Date of Decision

Update: IRS Notice 2014-37, issued May 15, 2014, expressly permits sponsors of §401(k) and §401(m) safe-harbor plans (including §403(b) plans that are safe-harbor with respect to matching contributions) to adopt amendments implementing the requirements of United States v. Windsor in accordance with theamendment deadlines specified in IRS Notice 2014-19, described below. A §401(k) or §401(m) safe-harbor plan is a plan that satisfies the §401(k) or §401(m) nondiscrimination requirements, respectively, by providing specified minimum matching or non-elective contributions. Safe-harbor plan amendments generally must be adopted before the start of a plan year and must be effective for the entire year unless a special exception is provided. As a result, because an amendment implementing United States v. Windsor, if required for a plan, generally must be effective as of June 26, 2013 and adopted by December 31, 2014, a calendar-year §401(k) or §401(m) safe-harbor plan, for example, would not have been able to adopt such an amendment without the exception provided by the Notice.

On April 4, 2014, the Internal Revenue Service (IRS) issued Notice 2014-19, clarifying that tax-qualified pension and savings plans are required to apply the U.S. Supreme Court’s decision in United States v. Windsor operationally as of June 26, 2013, the date of the decision.1 Plans are not required to apply the decision before that date. The Notice is welcome news because it means that, for purposes of tax qualification, plans will not be put in the difficult and sometimes impossible position of having to undo actions taken in accordance with prior law.

After providing some brief background information, this Compliance Alert summarizes the guidance provided in the Notice and the related answers to Frequently Asked Questions (FAQs), which were issued at the same time.2 It also offers some action items for employers to consider.

Background

The 1996 federal Defense of Marriage Act (DOMA) defined “marriage” and “spouse” for purposes of all federal laws, including federal tax law, to mean, respectively, only an opposite-gender couple and an opposite-gender individual. On June 26, 2013, the U.S. Supreme Court, in United States v. Windsor, held that the DOMA definitions were unconstitutional.3 As a result of that decision, individuals in legal same-gender marriages are now required to be treated as married under federal law. The Court did not address two important questions: whether the status of a same-gender couple as married would be determined under the laws of the state in which the couple was married (the state of celebration) or the laws of the state in which the couple lives (the state of residence); and whether the decision would have to be applied retroactively.

The question of which state law determines the marital status of same-gender couples for federal tax law purposes was answered in IRS Revenue Ruling 2013-17.4 The Revenue Ruling provides that, effective September 16, 2013, the IRS will treat a same-gender couple as married for all federal tax purposes if the couple was legally married in the state of celebration regardless of the state of residence.

Application to Qualified Retirement Plans

The federal tax rules that apply to qualified plans provide special rules for spouses in certain circumstances, including required spousal survivor benefits and more favorable tax treatment for certain distributions.5 Under DOMA, plans were not permitted to treat the same-gender spouses of legally married participants as “spouses” for purposes of the qualified plan rules. As a result of the Windsor decision, they must now do so, and under Notice 2014-19, which is guidance specifically intended for qualified §401(a) plans and §403(b) plans, that treatment must be effective as of June 26, 2013. Generally, plans also must use the state of celebration rule to determine whether a same-gender couple is married for purposes of the tax-qualification rules. However, because the IRS did not adopt the state of celebration rule until September 16, 2013, the Notice also provides that plans may apply the state of residence rule for that determination for the limited period starting with June 26, 2013 and ending September 15, 2013.

Plans also are permitted to recognize same-gender marriages before June 26, 2013. Subject to any applicable qualification rules (e.g., nondiscrimination rules), such retroactive recognition may be limited to only certain spousal requirements, such as qualified joint and survivor annuities (QJSAs) and qualified preretirement survivor annuities (QPSAs), and the retroactively recognized requirements may be given different effective dates. Finally, also subject to any applicable qualification rules, plans are permitted to add new rights or benefits for participants with same-gender spouses, such as second elections for married participants who, because they started to receive benefits before the decision date, were not offered a QJSA.

Plan Amendments and Deadlines

Whether a plan must be amended for the Windsor decision and the subsequent IRS guidance depends upon the language currently in the plan. If the plan can be operated in compliance with the Windsor decision and the subsequent IRS guidance without changing its language, no amendment is required. Examples of current plan terms that might not require amendment are terms such as “spouse,” “legally married spouse” or “spouse under federal law” that are not otherwise limited to opposite-gender spouses and do not refer to the laws of the state of residence. However, the Notice suggests that, even though not 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 the Notice must be amended for that purpose.

Amendments under Notice 2014-19 must be effective as of June 26, 2013 (unless an earlier effective date is selected). Generally, for employers with calendar tax years, amendments must be adopted (signed and dated) on or before December 31, 2014.6 Generally, for employers with off-calendar tax years, amendments must be adopted by the due date of the employer’s tax return (plus extensions) for the tax year that includes June 26, 2013, if that date is later than December 31, 2014. However, for off-calendar tax year employers that will file for determination letters in Cycle D (employers with EINs ending in 4 or 9) it appears that in some cases the latest adoption deadline might be January 31, 2015 because of the need to include the Windsor amendments individually and as part of the restatement in the Cycle D filing.7

Other Issues

To the extent that a plan did not operate in accordance with the Windsor decision during a period that the Windsor decision applied, the operational error may be corrected using the principles of the IRS Voluntary Correction Program, as described in IRS Revenue Procedure 2013-126.8 It appears that this can be accomplished as a self-correction, without the need for a formal submission.

In the case of a single-employer defined benefit plan, an employer may not amend the plan to increase benefits if the plan’s adjusted funding target attainment percentage (AFTAP) is below 80 percent unless the employer increases contributions to pay for the amendment. The Notice provides a special rule under which amendments that are required to bring a plan into compliance as of June 26, 2013 with the Windsor decision and subsequent guidance will not be considered amendments increasing benefits for purposes of Section 436 of the Internal Revenue Code (IRC). Amendments that are optional or that apply the Windsor decision before June 26, 2013, do not get the benefit of the special rule.

Observations and Steps to Consider

While the guidance provided by the Notice and the related FAQs is very helpful with regard to plan administration, it is important to note that the Notice addresses the retroactive application of the Windsor decision only for purposes of the tax rules. It does not address the retroactive application of the Windsor decision for other purposes, particularly benefit claims under the Employee Retirement Income Security Act (ERISA)9 As a result, when considering the various options for implementing the Windsor decision as discussed in the Notice, employers might want to keep in mind that the law on this issue is far from settled, and their plans might well be faced with claims for spousal benefits with respect to pre-Windsor decision benefit determinations.

Now that a deadline for plan amendments has been announced, it is time for employers, with their attorneys’ advice, to consider in earnest how the Windsor decision and the subsequent IRS guidance will affect their qualified plans and what, if any, steps they need to take to bring those plans into compliance, both in form and operation.

These steps could include:

  • Reviewing plan operations to ensure that, from the June 26, 2013 decision date forward, spouses of participants in legal same-gender marriages have been treated as spouses for all required purposes under the plan. Required purposes include, where applicable: survivor benefits and spousal consents; benefit limitations; survivor/death benefit required beginning dates; rollovers, loans, hardship distributions, and qualified domestic relations orders. To the extent that plan operations did not fully reflect the Windsor decision and the subsequent guidance during this period, determine and implement the necessary corrective actions.
  • Reviewing benefit commencements for some period before June 26, 2013 to help assess the possible need for, and costs associated with, retroactive application of the Windsor decision. Such a review also could help in the determination of whether additional benefits or options, such as second benefit elections, should be considered.
  • Reviewing plan documents to determine whether amendments are necessary or desirable. Related documents that might refer to qualified plan document definitions, such as summary plan descriptions, election forms, and other plan documents (e.g., nonqualified deferred compensation plans, if any) also should be reviewed and amended, if necessary. To the extent that amendments will be needed, reserve time now on the appropriate meeting agendas to ensure that the amendments will be approved, signed and dated on or before the applicable deadline.
  • Communicating with all participants about the implementation of the Windsor decision and encouraging all participants to review their beneficiary designations under all plans to make sure the designations are up to date. Consider including the fact that, for legally married same-gender couples, any prior designations of non-spouse beneficiaries became invalid on June 26, 2013, in the absence of the same-gender spouse’s consent to the designation.

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As with all issues involving the interpretation or application of laws, regulations, and other guidance, employers should rely on their attorneys for authoritative advice on these matters. Sibson Consulting can be retained to work with employers and their attorneys to implement the Windsor decision and the related IRS guidance.

 

1 IRS Notice 2014-19 is on the IRS website. The U.S. Supreme Court opinion in United States v. Windsor is on the U.S. Supreme Court website. (Return to the Compliance Alert.)

2 The “Application of the Windsor Decision and Post-Windsor Published Guidance to Qualified” are on the IRS website. (Return to the Compliance Alert.)

3 See Sibson Consulting’s July 2013 Bulletin, “What the U.S. Supreme Court’s DOMA Decision Means for Benefit Plans.” (Return to the Compliance Alert.)

4 Rev. Rul. 2013-17 is on the IRS website. See also Sibson’s September 13, 2013 Compliance Alert, “Federal Tax Law Recognizes All Legal, Same-Gender Marriages Regardless of Where Couples Live.” (Return to the Compliance Alert.)

5 For a list of the main spousal benefit provisions that are affected by the Windsor decision, see “Same-Gender Marriage: Action Steps for Retirement Plan Trustees” (a supplement to Sibson’s February 16, 2013 Compliance Alert, “Washington State Is Latest Jurisdiction to License Same-Gender Marriages”). (Return to the Compliance Alert.)

6 If the plan in question is an IRC §403(b) plan, the amendment deadline above does not apply, and the IRS will announce the date by which amendments will be required. See Section 21.05 of Rev. Proc. 2013-22. (Return to the Compliance Alert.)

7 See Revenue Procedure 2007-44, §5.05, §2.05, and (for tax-exempt employers) §5.0(2) for a complete description of the adoption deadlines. With regard to acceleration of the adoption deadline for employers with off-calendar tax years because of a determination letter filing, see Revenue Procedure 2007-44 §12.03. (Return to the Compliance Alert.)

8 IRS Retirement Plan FAQ No. 3. See Rev. Proc. 2013-12. (Return to the Compliance Alert.)

9 The Department of Labor has adopted the state of celebration rule generally for purposes of ERISA, but has not addressed the issue of retroactive application. See EBSA Technical Release 2013-4. (Return to the Compliance Alert.)