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Mondress Monaco Parr Lockwood PLLC
Mondress Monaco Parr Lockwood PLLC

Guidance for Retirement Plans on Retroactivity of Windsor

In April 2014, the IRS issued new guidance (Notice 2014-19 and website FAQs) on applicability of the Windsor decision to retirement plans.1 In short, the guidance provides that plans must operationally comply with Windsor effective June 26, 2013, and plan sponsors have at least until December 31, 2014 to adopt any required plan amendments.

Background

The Defense of Marriage Act (DOMA) was signed into law in 1996.  Section 3 provided that, for purposes of all federal laws, “marriage” meant only marriage between a man and a woman, and a “spouse” could only be a person of the opposite sex.  On June 26, 2013, in United States v. Windsor, the U.S. Supreme Court overturned Section 3.2 As a result, federal law now recognizes same-sex marriages.

The Tax Code and ERISA include numerous rules intended to protect a spouse’s right to share in retirement income.  Due to Windsor, retirement plans must extend these protections to same-sex spouses. For example:

  • Plans subject to the Code’s qualified joint and survivor annuity (QJSA) and qualified pre-retirement survivor annuity (QPSA) requirements must pay a survivor annuity to a participant’s same-sex spouse, unless the spouse consents to a different beneficiary or form of payment;
  • Same-sex spouses may make direct rollovers to the spouse’s own IRA or employer plan, and they also qualify for the more favorable required minimum distribution (RMD) rules afforded to spouses; and
  • Same-sex spouses may obtain qualified domestic relations orders (QDROs), consistent with state law.

However, Windsor left many open issues—notably, whether spousal status is affected by the laws of the state in which the couple resides, and whether plans must retroactively recognize same-sex marriages.  The IRS and DOL addressed the first issue last September, holding that a “spouse” for purposes of the Tax Code and ERISA includes individuals who were legally married under the laws of the state (or foreign country) where the ceremony was performed, even if the individual later resides in a state that does not recognize the marriage.3 This is known as the “state of celebration” standard (as opposed to the “state of residence” standard, which would only recognize same-sex spouses residing in a state that recognizes the marriage).  The IRS’ ruling was effective September 16, 2013, and the DOL’s ruling did not address effective dates.  Both agencies promised further guidance.

New Notice 2014-19

Operational Compliance

Notice 2014-19 provides that qualified plans must be operationally compliant with Windsor effective as of June 26, 2013 (the date the decision was issued), and operationally compliant with the state of celebration standard effective as of September 16, 2013 (the date of the prior IRS guidance).  For the gap period of June 26–September 16, 2013, plans may follow either the state of celebration or the state of residence standard.  Sponsors may choose to apply Windsor for some or all plan purposes (e.g., solely for purposes of the QJSA/QPSA requirements) as of a date earlier than June 26, 2013, provided applicable qualification requirements are otherwise satisfied.  However, the IRS cautioned that early implementation may trigger requirements that are difficult to administer retroactively (such as ownership attribution rules), and may create unintended consequences.

Plan Amendments

No amendment is required if plan terms are consistent with Windsor and the IRS guidance.  For example, no amendment is required if 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.  However, the IRS noted that a clarifying amendment may be useful for purposes of plan administration.

A plan amendment is required if plan terms are inconsistent with Windsor and the IRS guidance (e.g., if the plan defines “spouse” by reference to DOMA), or if Windsor is implemented earlier than June 26, 2013.  Sponsors of qualified plans have at least until December 31, 2014 to adopt any required amendments (see below with respect to Code § 403(b) plans).4

New IRS FAQs

The accompanying FAQs provide additional guidance, and are summarized below:

  • Beneficiary designationsfor plans not subject to QJSA/QPSA requirements. If a participant dies on or after June 26, 2013 with a surviving same-sex spouse, benefits must be paid to the spouse unless he or she has consented to designation of another beneficiary, or a QDRO provides otherwise.  (As noted above, from June 26–September 16, 2013, “spouses” may be identified using the state of residence standard.)
  • Choice of law provision. A plan’s choice of law provision (e.g., requiring the plan be interpreted in accordance with the laws of a state that does not recognize same-sex marriage) does not trump the plan’s obligations under Notice 2014-19.
  • Retroactive corrections. Retroactive Windsor amendments must be implemented consistent with EPCRS principles. For example, a defined benefit plan may correct a failure to obtain a same-sex spouse’s waiver of a QJSA by following the appropriate EPCRS correction (which is notifying the affected participant and spouse, so that the spouse can consent to the distribution or the participant can repay the distribution and receive a QJSA).
  • Additional rights.  A plan may be amended to provide new rights or benefits for participants with same-sex spouses, provided the amendment complies with otherwise applicable qualification requirements.  For example, a plan could be amended to provide a new opportunity to elect a QJSA, for participants who retired before June 26, 2013 and were not offered a QJSA for their same-sex spouse.
  • 403(b) plans. The IRS clarified that its interpretation of Windsor applies for purposes of all federal tax rules, including those applicable to Code § 403(b) plans.  Code § 403(b) plans must adopt any required Windsor amendments by the deadline described in Sec. 21 of Rev. Proc. 2013-22.
  • Funding rule relief for defined benefit plan amendments. Under Notice 2014-19 and the FAQs, if a defined benefit plan adopts a required Windsor amendment as of June 26, 2013 (but no earlier), the amendment is not subject to Code § 436(c) restrictions (with respect to single-employer plans)5 or the Code § 432 limits on benefit increases (with respect to multiemployer plans).6 A multiemployer plan must adopt the amendment during its funding improvement period or rehabilitation period in order for the relief to apply.

Action Items

Pending further guidance, employers can take the following steps now, with respect to their retirement plans:

  • Decide whether to implement early.  Windsor and the state of celebration standard can be implemented earlier than required (June 26, 2013 and September 16, 2013, respectively).
  • Timely adopt a plan amendment, if required.  As explained above, an amendment is required if: (a) plan terms are inconsistent with Windsor and IRS guidance, (b) Windsor is applied earlier than June 26, 2013, or (c) new benefit rights are provided for participants with same-sex spouses.  Any plan changes should be timely communicated to participants.
  • Review prior administration. If the plan was not operated in accordance with plan terms (including any required Windsor amendment), take corrective action consistent with EPCRS principles.
  • Review plan forms, policies and procedures. For example, beneficiary designation and retirement application forms may need to be updated.

Windsor created a host of issues for employers and plans.  As this area of law is rapidly evolving, employers should continue to monitor agency guidance.

Not intended as legal advice.


1 Notice 2014-19 is available at http://www.irs.gov/pub/irs-drop/n-14-19.pdf and the FAQs are available at http://www.irs.gov/Retirement-Plans/Answers-to-Frequently-Asked-Questions-Regarding-the-Application-of-the-Windsor-Decision-and-Post-Windsor-Published-Guidance-to-Qualified-Retirement-Plans.

2 The Supreme Court’s decision did not address Section 2 of DOMA, which allows each state to refuse, for purposes of that state’s law, to recognize same-sex marriages performed in other jurisdictions.

3 The IRS ruling (Revenue Ruling 2013-17) is available at http://www.irs.gov/pub/irs-drop/rr-13-17.pdf, and the DOL ruling (Technical Release 2013-04) is available at http://www.dol.gov/ebsa/newsroom/tr13-04.html.

4 Specifically, the amendment deadline is the later of (a) December 31, 2014, (b) the applicable deadline pursuant to sec. 5.05 of Rev. Proc. 2007-44, or (c) for governmental plans, 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.  Under sec. 5.05 of Rev. Proc. 2007-44, the interim amendment deadline for changes to qualification requirements that affect plan terms is the later of the end of plan year in which the change is effective or the due date of the employer’s tax return for the tax year that includes the date the change is effective; for discretionary amendments, the deadline is the end of the plan year in which the change is effective.

5 Under Code § 436(c), an amendment that increases the liabilities of a single-employer defined benefit plan generally cannot take effect unless the plan’s adjusted funding target attainment percentage is sufficient or the employer makes an additional funding contribution. However, in Notice 2014-19 the IRS exercised its authority to make exceptions.

6 A multiemployer plan subject to Code § 432 generally cannot be amended in a manner that increases liabilities unless the amendment is to comply with a qualification requirement or other applicable law, and is adopted during the funding improvement period or rehabilitation period.