compliance alert

May 1, 2014

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

Update: This information will be of interest to multiemployer profit sharing plans with a §401(k) feature intended to be "safe harbor" for purposes of testing participant pre-tax contributions. IRS Notice 2014-37, issued May 15, 2014, expressly permits sponsors of §401(k) safe-harbor plans 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) safe-harbor plan is a plan that satisfies the §401(k) nondiscrimination requirements 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) 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 trustees 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 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). For calendar year plans, amendments must be adopted (signed and dated) on or before December 31, 2014. Generally, for plans with off-calendar plan years, amendments must be adopted by the last day of the 10th month of the plan year following the plan year that includes June 26, 2013, if later than December 31, 2014. However, because of the Cycle D determination letter filing, it appears that 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. For example, a plan with a plan year beginning June 1 normally would have an adoption deadline of March 31, 2015, but because of Cycle D, the plan might have an accelerated deadline of January 31, 2015. On the other hand, a plan with a plan year beginning on July 1 that normally would have an adoption deadline of April 30, 2014, has its deadline extended under the Notice to December 31, 2014.6

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 2013-1267. It appears that this can be accomplished as a self-correction, without the need for a formal submission.

In the case of multiemployer defined benefit plans in the yellow or red zones, amendments increasing liabilities (e.g., through benefit increases) generally are not permitted, except that amendments required as a condition for qualification or to comply with other applicable laws are permitted for plans in their funding improvement adoption period or rehabilitation plan adoption period under Sections 432(d)(1)(B) or 432(f)(4)(B), respectively, of the Internal Revenue Code (IRC). The guidance clarifies that amendments required to bring a plan into compliance as of June 26, 2013 with the Windsor decision and subsequent guidance that are effective on that date are permitted amendments during the applicable adoption period, as well as permitted amendments for plans that are in their funding improvement period or rehabilitation period under IRC §432(d)(2)(C) or IRC §432(f)(1)(B), respectively (notwithstanding the absence of statutory language to that effect). In contrast, amendments that are optional, or that apply the Windsor decision before June 26, 2013, are not permitted amendments.8

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, trustees 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 trustees, with the advice of fund counsel, 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.

●  ●  ●

As with all issues involving the interpretation or application of laws, regulations, and other guidance, trustees should rely on their fund counsel for authoritative advice on these matters. Segal Consulting can be retained to work with trustees and fund counsel 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 "Answers to Frequently Asked Questions Regarding the Application of the Windsor Decision and Post Windsor Published Guidance to Qualified Retirement Plans" (Retirement Plan FAQs) are on the IRS website. (Return to the Compliance Alert.)

3 See Segal 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 Segal’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 Segal’s February 16, 2012 Compliance Alert, "Washington State Is Latest Jurisdiction to License Same-Gender Marriages"). (Return to the Compliance Alert.)

6 See IRS Revenue Procedure 2007-44, §5.05 and §2.05 for a complete description of the adoption deadline. With regard to acceleration of the adoption deadline for off-calendar year plans because of a determination letter filing, see Revenue Procedure 2007-44 §12.03. Generally, for international and local union staff plans operating under the single-employer rules, the adoption deadline will be December 31, 2014 for plan sponsors with calendar tax years; for plan sponsors with off-calendar tax years, the adoption deadline will vary depending upon the plan’s filing Cycle and whether the plan is a single employer or multiple employer plan. (Return to the Compliance Alert.)

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

8 IRS Retirement Plan FAQ No. 6. (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.)

 

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 plan sponsors 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 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 plans, that treatment must be effective as of June 26, 2013, the decision date. Generally, plans also must use the state of celebration rule to determine whether a same-gender couple is married for purposes of 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. Such retroactive recognition may be limited to only certain spousal requirements, and the retroactively recognized requirements may be given different effective dates. In addition, plans are permitted to add new rights or benefits for participants with same-gender spouses, such as applying any spousal consent rules that the plan has to same-gender spouses, to the extent such a change is desirable and consistent with state law.

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. 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.

For governmental plans, it may be useful to amend the plan to distinguish between the plan’s rules for spouses that are governed by federal law and those that are governed by state law. This is particularly important for plans in states that do not recognize same-gender marriage or states that do recognize formal relationships under state law, such as civil unions and domestic partnerships.

Amendments under Notice 2014-19 must be effective as of June 26, 2013 (unless an earlier effective date is selected). The deadline by which governmental plans must adopt such amendments is not earlier than the close of the first legislative session of the legislative body with the authority to amend the plan that ends after December 31, 2014.

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 2013-12.6 It appears that this can be accomplished as a self-correction, without the need for a formal submission.

Observations and Steps to Consider

Now that a deadline for plan amendments has been announced, it is time for plan sponsors, 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 federal law purposes under the plan. Required purposes include: survivor/death benefit required beginning dates; rollovers and the taxation of benefit payments under qualified domestic relations orders.7 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 plan documents to determine whether amendments are necessary or desirable. Related documents that might refer to qualified plan document definitions, such as plan summaries, 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.

●  ●  ●

As with all issues involving the interpretation or application of laws, regulations, and other guidance, plan sponsors should rely on their attorneys for authoritative advice on these matters. Segal Consulting can be retained to work with plan sponsors and plan counsel 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 Segal Consulting’s July 2013 Bulletin, "Implications of the U.S. Supreme Court’s DOMA Decision for Public Sector Plans." (Return to the Compliance Alert.)

4 Rev. Rul. 2013-17 is on the IRS website. See also Segal’s September 13, 2013 Compliance Alert, "Implications for Sponsors of Public Sector Plans of Federal Tax Law Recognition of 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 Public Sector Retirement Plan Sponsors" (a supplement to Segal's February 16, 2012 Compliance Alert, “Washington State Is Latest Jurisdiction to License Same-Gender Marriages”). (Return to the Compliance Alert.)

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

7 For a more-detailed discussion of required and voluntary spousal benefits under federal tax law and local law considerations for governmental plans, see Segal’s September 13, 2013 Compliance Alert, “Implications for Sponsors of Public Sector Plans of Federal Tax Law Recognition of All Legal, Same-Gender Marriages Regardless of Where Couples Live.” (Return to the Compliance Alert.)

 

Compliance Alert, Segal Consulting’s periodic electronic publication summarizing important developments affecting benefit plan compliance, is for informational purposes only and should not be construed as legal advice or authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on legal counsel for legal advice.

Compliance Alert, Segal Consulting’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only and should not be construed as legal advice. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, trustees should rely on fund counsel for legal advice.

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