By: Natasha Erskine, CPA
The Internal Revenue Service (IRS) recently released guidance on the effective date by which qualified retirement plans must recognize same-sex spousal rights as a result of the U.S. Supreme Court’s decision in United States v. Windsor (Windsor). IRS Notice 2014-19 clarifies certain retroactive retirement plan implications of the Supreme Court’s Windsor ruling. Notably, the guidance requires plans to be administered to reflect the Windsor ruling effective June 26, 2013, but does not require plans to apply same-sex spousal rights retroactively. Similarly, retirement plans that initially recognized same-sex marriage based on the “state of domicile” rule (the state in which you reside), rather than the IRS’ “state of celebration” rule (the state where the marriage ceremony occurred), are not required to retroactively adopt the state of celebration rule prior to September 16, 2013. In addition, the notice clarifies the requirements for any Windsor-related plan amendments.
In 1996, the Defense of Marriage Act (DOMA) was signed into federal law by President Clinton. Section 3 of DOMA provides that a marriage may only be between a man and a woman for purposes of federal law. On June 26, 2013, the Windsor decision held that section 3 of DOMA establishing marriage for federal law purposes as a legal union between opposite-sex spouses was unconstitutional. The Supreme Court did not rule on the constitutionality of Section 2 of DOMA, which remains in effect. As such, individual states were not required to recognize same-sex marriages.
New Regulatory Guidance
On August 29, 2013, the IRS released Revenue Ruling 2013-17. The Revenue Ruling provides, effective September 16, 2013, that same-sex couples married in a state that recognizes same-sex marriage will be married for federal tax and qualified retirement plan purposes. Following suit, on September 18, 2013, the DOL published similar guidance in Technical Release 2013-04 that adopted the “state of celebration” rule for purposes of employee benefit plans. However, this earlier guidance did not specify how and when qualified retirement plans needed to comply with these new rules and requirements. On April 4, 2014, the IRS issued additional guidance set forth in IRS Notice 2014-19 for the timing and scope of the implementation of same sex spousal rights by qualified retirement plans.
Impact for Plan sponsors
Effective September 16, 2013, legally married same-sex spouses now have the same spousal rights as opposite-sex spouses under tax-qualified retirement plans, regardless of the state in which they live. A plan amendment is not required due to the Windsor decision unless the plan’s provisions conflict with the law, (e.g., if the plan defines the term “marriage” or “spouse” by reference to DOMA, the plan would need to be amended). If an amendment is necessary or the plan sponsor chooses to amend the plan to clarify the change in operation, generally the amendment must be adopted by December 31, 2014 for calendar year plans. Summary Plan Descriptions should also be updated. Plan Counsel should be consulted regarding the required plan amendments. As noted above, operational compliance for plan qualification purposes is required as of September 16, 2013 (if state of domicile). A plan’s failure to recognize same-sex marriage after that date could adversely affect the plan’s tax-qualified status.
It is clear in the IRS guidance, that retroactive only to June 26, 2013, all qualified retirement plans must recognize same-sex spouses regardless of whether same-sex marriage is legal in the state where the participant lives. The plan sponsor may use a “state of domicile” approach from June 26, 2013, and must use the “state of celebration” approach beginning September 16, 2013.
Plan sponsors should communicate with participants about these new changes as a result of the Windsor decision, including notifying participants of their rights to change their beneficiary designation.
Plan sponsors should update their benefit election forms to notify participants of spousal eligibility for certain forms of payment and to clarify that a same-sex spouse’s consent may be required for loans and certain distributions.
For hardships, plan sponsors need to consider if the qualifying need can be satisfied from other sources, this consideration now extends to the same-sex spouse and their assets as well as the expenses of the same-sex spouse.
Plan sponsors should update their QDRO procedures and rollover forms to reflect changes for same-sex spouses.
If the plan sponsor paid benefits to the wrong beneficiary since June 26, 2013, it is a qualification failure and would need to be corrected through the Employee Plans Compliance Resolution System (EPCRS) program.
In addition, plan sponsors should review their retirement plan documents including prototype plan documents to determine whether amendments are required to clarify the administration of spousal rights and benefits for same-sex spouses. If an amendment is not technically required by the IRS, because the plan has a neutral definition of spouse that does not conflict with Windsor, then a clarifying amendment may be helpful for administration purposes. Generally, this retroactive amendment would need to be effective June 26, 2013 or September 16, 2013 depending on the state in which the plan sponsor operates and may be required to be adopted by December 31, 2014.
If you have any questions or would like more information on the issues discussed, please contact any of the following Briggs & Veselka Co. advisors:
Meresa Morgan, Audit Shareholder 713.667.9147 email@example.com
Kevin Hengst, Audit Principal 713.667.9147 firstname.lastname@example.org
Natasha Erskine, Audit Senior Manager 713.667.9147 email@example.com
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