Friday, May 23, 2014

IRS Issues New Guidance on Windsor's Application to Tax Qualified Retirement Plans

The IRS has issued additional guidance (i.e., Notice 2014-19) regarding the impact that the U.S. Supreme Court's United States v. Windsor decision will have on tax-qualified retirement plans.  In Windsor, the Court upheld a lower court's determination that Section 3 of the Defense of Marriage Act ("DOMA") is unconstitutional.  Section 3 of DOMA defined "marriage," for most federal purposes, as "a legal union between one man and one woman as husband and wife."  It goes on to state that "the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife."

Immediately following the Windsor decision, the IRS released guidance that confirmed married same-sex couples would be treated as married for federal tax purposes if the marriage took place in a jurisdiction that legally recognizes same-sex marriages, regardless of where the couple resides.  (See Revenue Ruling 2013-17.)  Notice 2014-19 focuses on retirement plans that are qualified under Section 401(a) of the Internal Revenue Code (the "Code") and it provides guidance, in question and answer format, on the effective date and timing of plan amendments to implement Windsor.

Effective Date.  As of June 26, 2013 (i.e., the date of the Windsor decision), qualified retirement plans must reflect the outcome of Windsor.  Between June 26, 2013 and September 16, 2013, qualified plan sponsors may elect to recognize only the same-sex marriages of those participants who reside in states where same-sex marriage is recognized.  Beginning September 16, 2013, qualified retirement plans must recognize all participants' same-sex marriages, regardless of whether the couple resides in a state that recognizes same-sex marriage.   

Qualified plan sponsors may elect to recognize same-sex marriage before June 26, 2013, as long as all of the Code's qualification requirements are met.  The IRS has acknowledged that qualified plan sponsors who choose to recognize same-sex marriage before June 26, 2013 may unwittingly trigger requirements that are difficult to implement and create unintended consequences.

Plan Amendments.  Qualified retirement plan documents that exclude same-sex spouses from the definition of "spouse" must be amended.  Where a qualified plan's terms are not inconsistent with the outcome of Windsor, a plan amendment is generally not required.  A clarifying amendment, however, may be useful for purposes of plan administration.  If no amendment is made to a qualified plan, it nonetheless must be operated in a manner that reflects the outcome of Windsor.

Deadline to Adopt Plan Amendments.  The deadline for qualified plan sponsors to adopt a plan amendment to implement Windsor is the later of (i) December 31, 2014, or (ii) the applicable deadline under Section 5.05 of Rev. Proc. 2007-44.  (Section 5.05 of Rev. Proc. 2007-44 provides that plan sponsors must generally adopt plan amendments by the later of (i) the end of the plan year in which the change is first effective , or (ii) the due date of the employer's tax return for the tax year that includes the date the change is first effective.) 

Code Section 436(c) Rule.  In general, under Code Section 436(c), an amendment to a single-employer defined benefit plan that increases plan  liabilities cannot take effect unless either the plan's adjusted funding target attainment percentage is sufficient or the employer makes  additional contributions to the plan, as specified under Section 436(c)(2).  Notice 2014-19 provides the following special rule for single-employer defined benefit pension plans: a qualified plan amendment that serves to implement Windsor and that takes effect on June 26, 2013 will not be treated as an amendment to which Code Section 436(c) applies.  In contrast, Code Section 436(c) does apply to a qualified plan amendment that serves to recognize same-sex marriage and that takes effect before June 26, 2013. 

Action Steps for Employers.  Employers are advised to review retirement plan operations to ensure that their plans have been administered consistently with Windsor and correct any errors, if necessary.  Corrections involving the exclusion of same-sex spouses from rights under the plan should be made consistent with the IRS's correction methodology in Rev. Proc. 2013-12, and an IRS filing may be required, depending on the size of the error.   

Employers should also notify employees of the changes to the rights of same-sex spouses to employer provided benefits under all benefit plans, including qualified retirement plans.  This may include email or written notifications requesting that same-sex spouses update their personnel records (to include their spouse's information) and re-soliciting beneficiary designations, as required.  Employers should proactively communicate to employees the changes that resulted from Windsor and obtain appropriate documentation for all employees in same-sex marriage as soon as possible.