Society of Actuaries Releases New Mortality Tables

Defined benefit pension plan sponsors use mortality tables for a variety of purposes, including calculating lump sum distributions and minimum contribution requirements.  The IRS mandates the mortality tables that plan sponsors must use when calculating lump sum distributions and minimum contributions obligations. 

Currently, plan sponsors must use the RP-2000 mortality table to determine present value lump sum conversions and minimum contributions.  The Society of Actuaries (the "SOA") published RP-2000, and it is based on data from over 20 years ago.  Given that the RP-2000 data is stale and that the Pension Protection Act of 2006 mandated a review of IRS-required mortality tables every ten years, the SOA, in 2009, began a study to update underlying mortality assumptions.

In February 2014, the SOA released "exposure drafts" of a new mortality table, RP-2014, and a new mortality improvement scale.  RP-2014 contained a new table for disabled life mortality, and separate tables for white collar and blue collar participants.  As expected, RP-2014 reflects longer life expectancies.  The SOA has asked the actuarial community to submit comments on RP-2014 on or before May 31, 2014.  After reviewing these comments, the SOA will issue a final report containing the RP-2014 and the new mortality improvement scale.  

IRS Notice 2013-49 contains the mortality tables that plan sponsors must use for the 2014 and 2015 valuation years.  These tables are predicated on RP-2000.  IRS is expected to require plan sponsors to begin using RP-2014 for the 2016 valuation year.  For accounting purposes, however, plan sponsors may elect to adopt RP-2014 earlier to determine pension liabilities.

While the final content of RP-2014 is unknown,the following is certain: in application, RP-2014, which reflects longer life expectancies, will produce larger pension liabilities and increase the cost of lump sum distributions and plan contribution obligations.  RP-2014 will also affect defined contribution plans, as annuities purchased with account balances will cost more and provide lower monthly benefits. 

In view of the imminent release of RP-2014, plan sponsors are advised to consult with their ERISA counsel and actuaries to formulate strategies to manage the increased pension plan liabilities and contribution obligations that will result.

Compliance Refresher: Fee Disclosure Deadlines

Effective as of July 2012, retirement plan service providers must provide plan sponsors with a disclosure regarding the compensation they receive for the services provided (i.e., the ERISA 408(b)(2) disclosure).  In addition, effective as of August 2012, employers that sponsor retirement plans with participant-directed accounts must disclose detailed investment-related information to participants using a comparative chart format (i.e., the ERISA 404(a)(5) disclosure).

Retirement plan sponsors and service providers are advised to review the timing requirements for these mandatory disclosures and determine whether any information requirements have changed since the original disclosures.  This article will review the distribution deadlines for each disclosure and if applicable, any transitional relief provided by the Department of Labor ("DOL").

408(b)(2) Disclosures.  The service provider fee disclosure mandate under the DOL's 408(b)(2) regulations became effective on July 1, 2012.  Accordingly, covered service providers must have provided such fee disclosures to all existing plan sponsor clients by July 1, 2012.  Service providers must provide updated fee disclosures to plan sponsors following a change in fee information as soon as practicable, but in no event later than 60 days after the change.  

Barring a change in fee information, service providers need only furnish updated fee disclosures to plan sponsors when the underlying service agreement is extended or renewed.  Where a service provider enters into a new service arrangement with a plan sponsor, it must provide the mandatory fee disclosure "reasonably in advance" of the commencement of services. 

It should be noted that recordkeepers are subject to additional 408(b)(2) disclosure rules.  In addition to providing a 408(b)(2) fee disclosure reasonably in advance of being hired, recordkeepers must also provide fee and expense information concerning the plan's investment options.  Instead of the 60-day deadline for providing updated disclosures after a change in fee information occurs, however, recordkeepers need only provide updated disclosures on an annual basis. 

404(a)(5) Disclosures.  The DOL's 404(a)(5) regulations require plan sponsors to distribute, on an annual basis, a comparative chart to participants that summarizes the plan's investment options as well as provide, on a quarterly basis, certain fee disclosures to participants. Plan sponsors must furnish the comparative charts on an annual basis, meaning at least once in any 12-month period.  

Plan sponsors of calendar year plans were required to furnish the first comparative chart by August 30, 2012, and the first quarterly fee disclosure by November 14, 2012.  Thus, if the 2012 Comparative Chart was provided to participants in August 2012, the next comparative chart (the "2013 Comparative Chart") need not have been provided until August 2013. 

DOL recently issued regulatory relief that affects the timing of plan sponsors' 404(a)(5) disclosures.  In Field Assistance Bulletin 2013-02 ("FAB 2013-12"), DOL provided plan sponsors with an additional six-month period for furnishing the 2013 Comparative Chart.  Accordingly, a plan sponsor that provided the 2012 Comparative Chart in August 2012 had until February 2014 to provide the 2013 Comparative Chart.  Many plan sponsors used this regulatory relief to "reset" the annual timing for the Comparative Chart so as to align its distribution with other participant disclosures and to also allow the 2013 Comparative Chart to reflect performance data for the full 2013 calendar year. 

Plan sponsors that, prior to the issuance of FAB 2013-02, had already taken steps or incurred administrative costs to furnish the 2013 Comparative Chart by the original deadline (i.e.,August 2013) were provided a similar six-month grace period for furnishing the next comparative chart (the "2014 Comparative Chart").  While plan sponsors must furnish comparative charts to participants on at least an annual basis, there is no restriction against plan sponsors distributing comparative charts on a more frequent basis.

Re-Cap of Fee Disclosure Deadlines.  The 408(b)(2) regulations require covered service providers to furnish disclosures to plan sponsors in the following four instances:  

1.  when the service provider is first hired,

2.  when a service provider has changes or corrections to its previous disclosures,

3.  when a service provider's contract or arrangement is extended or renewed, and

4. when the plan's record keeper has updated fee and expense information for the plan's investment options (but only on an annual basis).

With respect to the ERISA 404(a)(5) disclosures, the DOL (pursuant to FAB 2013-02) provided plan sponsors with a one-time additional six-month grace period for furnishing the annual comparative charts so that  distribution efforts could be coordinated with other participant disclosures.  Indeed, many plans have already availed themselves of this six-month grace period when distributing the 2013 Comparative Chart.  Plan sponsors that were in the process of furnishing the 2013 Comparative Chart when FAB 2013-12 was released have the opportunity delay furnishing the 2014 Comparative Chart until as late as February 2015.

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.

DOL Proposal Requiring New "Roadmap" Guide for 408(b)(2) Fee Disclosures

On March 11, 2014, the U.S. Department of Labor (the "DOL") issued its long-anticipated proposal concerning a separate roadmap or guide (the "Guide") that would need to be included with a covered service provider's initial fee disclosures (the "Fee Disclosure") required by the final regulations (the "Final Regulation") under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").  The proposal ("Proposal"), which is in the form of an amendment to the Final Regulation, would require a covered service provider to provide a Guide to the responsible plan fiduciary (the "Plan Fiduciary") in certain circumstances in order to ensure that the Fee Disclosure is "evident and easy to find among other information that is provided."  The purpose of the Guide would be to help the Plan Fiduciary identify and find the relevant information contained in a Fee Disclosure that cross-references other documents or exceeds a maximum page length.   

 

The Proposal was foreshadowed in the preamble to the Final Regulation, which indicated that the DOL would be proposing additional guidance that would require covered service providers to furnish a summary or guide to aid Plan Fiduciaries as they reviewed the Fee Disclosures.  The DOL attached to the Final Regulation a sample guide for voluntary use only and reserved a place in the Final Regulation for such requirement in the future.  The wait is now over.  Under its Proposal, the DOL has now decided to require covered service providers to furnish a Guide, rather than a summary, to Plan Fiduciaries under certain circumstances.  The following highlights the key provisions of the Proposal, and our initial observations concerning its impact on the covered service provider community. 

 

Overview of Proposed Amendment.  The Proposal would add a new requirement, mandating that covered service providers furnish a Guide along with the Fee Disclosure if such disclosures are "contained in multiple or lengthy documents."  The covered service provider is the responsible party for providing the Guide, as it is adjudged by the DOL as being the best person to identify the location of what is often highly technical information found in multiple documents or in lengthy disclosures. 

 

Specifically, the Proposal states that the Guide must be provided if the Fee Disclosure (i) is not contained in a single document, or (ii) is contained in a single document that exceeds a specified number of pages.  In other words, the Guide would not be required if the Fee Disclosure were contained within a concise single document.  The DOL has reserved for comment the number of pages that would trigger the Guide requirement for a single-document Fee Disclosure. 

The Guide.  The Proposal contains specific requirements for the format and style of the Guide.  For each required disclosure item in the Fee Disclosure, the Guide must provide both a document and page reference, or some other sufficiently specific locator, such as a section number for a document or an electronic hyperlink that allows the Plan Fiduciary to easily find the Fee Disclosure item.  The DOL has requested comments as to the relative merits of a page reference versus a section reference. 

 

The Proposal does not change the required elements of the Fee Disclosure.  The Guide must disclose the location of the following eight categories:

• The description of services provided to the covered plan;
• The statement concerning services to be provided as a fiduciary under ERISA and/or as a registered investment adviser;
• The description of all direct compensation;
• The description of all indirect compensation;
• The description of compensation that will be paid among related parties;
• The description of any compensation for termination of the contract or arrangement;
• The description of all compensation (and/or a reasonable estimate of the cost to the covered plan) for recordkeeping services;
• For ERISA fiduciaries to investment products or recordkeeping platforms that make investment alternatives available, the description of compensation, annual operating expenses and ongoing expenses (or, if applicable, total annual operating expenses) for each applicable investment product or investment alternative.

The Guide must also identify a person or office, including contact information that the Plan Fiduciary may contact regarding the Fee Disclosures.  The Guide must be furnished as a separate document.

 

Electronic Disclosure.  The Final Regulation allows a covered service provider to furnish Fee Disclosures electronically, including disclosures provided through a website as long as the Fee Disclosure is readily accessible to the Plan Fiduciary and there has been a clear notification on how to access the Fee Disclosure.

 

The Proposal follows suit by allowing the Guide to be provided electronically, but the Guide must do more than merely provide hyperlinks to prospectuses or other documents.  Either a more specific link taking the reader directly to the required information must be furnished, or a page or sufficiently specific locator must be furnished in addition to the electronic hyperlink. 

 

Changes to the Guide.   Any change to the information provided in the Guide must be disclosed at least annually to the Plan Fiduciary.    

 

Effective Date.  The Proposal will be effective 12 months after the publication of a final rule concerning the Guide.   However, as noted below in Open Issues, the DOL is looking for comments and feedback in a number of areas, including the number of pages that would trigger the Guide requirement for a single-document Fee Disclosure.  The DOL has also announced that it will be conducting focus group sessions with fiduciaries to small pension plans after the end of the 90-day comment period, which may potentially extend the date of publication. 

 

Open Issues.  Items for which DOL seeks input and comment include the following:

• The number of pages that would trigger the Guide requirement for a single-document Fee Disclosure;
  • Related considerations for page format, font size, margin requirements that might allow for manipulation of the page length.
• Whether a document/page number or an alternative "sufficiently specific locator" such as a section number, would be the appropriate standard;
  • Should multiple alternatives be allowed, or should the final rule establish a single standard?
• The cost of implementing a specific page number requirement and web-based approaches, and the cost of technological requirements generally;
• Whether the separate document requirement for the Guide is likely to ensure that the Plan Fiduciary understands both the purpose and existence of the Guide;
  • Should the Guide contain specific language such as an introductory statement, or a statement as to its significance if furnished electronically?
• Whether the annual disclosure of changes to the Guide should be replaced by an annual disclosure of the entire Guide;
• Suggestions and data on any aspect of the Guide, including whether the Guide (or any suggested alternative) is feasible, cost-effective, and ultimately beneficial to the Plan Fiduciary; and
• The effective date of the new Guide requirement. 

Anticipated Impact on Service Providers

 

Many broker-dealer firms and record keepers currently use Fee Disclosures that cross-reference multiple documents (e.g., references to prospectuses, disclosures prepared for purposes other than ERISA compliance, or web-site information).  The Guide requirement may require a substantial re-engineering of the ERISA 408(b)(2) disclosure process for affected firms.  Even though the effective date is presumably many months away, the time and expense necessary to reconfigure a firm's disclosure process and to make the necessary technology changes may be significant, especially for larger firms with multiple offices and investment products.  A decision will need to be made in the relatively near future as to whether Fee Disclosures as modified by the proposed Guide requirement should be handled through internal staffing and resources, or outsourced to a third party provider that is capable of preparing the required Fee Disclosures for a fee .

 

The Guide requirement is not expected to have as large an impact on investment adviser firms.  Many registered investment advisers rely on their advisory agreement for purposes of complying with the Fee Disclosure rules.  Certain investment advisers may reference the firm's Form ADV Part 2 for 408(b)(2) fee disclosure purposes, but typically do not cross-reference any other documents.  If the length of their advisory agreements or cross-references to their ADV disclosures were to trigger the Guide requirement, investment adviser firms generally should be able to create any required Guide in consultation with counsel.

 

Final Thoughts.   The Guide is intended to supplement, rather than replace, a covered service provider's Fee Disclosure.  It is designed to serve as a "tool" to be used by the Plan Fiduciary, and the Guide should help Plan Fiduciaries navigate their respective covered service provider's Fee Disclosures.  At the same time, it will bring further attention to and place indirect pressure on the Plan Fiduciary to properly discharge its duty to evaluate the Fee Disclosure, assuming that the Guide achieves its intended purposes. 

 

Notwithstanding the costs and other challenges faced by the different members of the covered service provider community, it is important to remember that the overarching objective of the Guide is to facilitate an informed and thoughtful review of Fee Disclosures, which ultimately inures to the benefit of the plan and its participants.  Given that objective, we may see the Guide adopted by many covered service providers simply as a matter of industry best practices, even before the Proposal is finalized and actually implemented by the DOL. 

 

As the discussion continues among the DOL and the retirement community, we will be providing additional thoughts and insights on this development.

Rollovers Remain Under SEC and FINRA Scrutiny

The DOL has previously provided guidance regarding the prohibited transaction rules in the context of cross-selling IRA rollovers. The DOL stated in Advisory Opinion 2005-23A a rationale for drawing a line between:

• Investment professionals providing plan-level fiduciary advice; and

• Investment professionals assisting a plan in a non-fiduciary capacity.

The status of the financial adviser as a  "fiduciary" (i.e., the investment adviser platform) or "non-fiduciary" (i.e, the broker-dealer platform) when cross-selling IRA products and services has thus become a gating factor for whether the increased compensation that often accompanies IRA rollover transactions is available from an ERISA perspective.  However, the story does not end here.  The SEC and FINRA have recently reminded the financial advisory community of their concerns about IRA rollovers.

FINRA Regulatory Notice.  On December 30, 2013, FINRA issued Regulatory Notice 13-45 ("Notice"), stating that a top examination priority of 2014 will be to review firm practices when recommending a rollover of assets from an employer sponsored retirement plan to an IRA.  (Interestingly, the SEC has announced that its 2014 examination priorities will include a review of practices by both broker dealers and investment advisers when retirement vehicles and rollover recommendations are involved).  FINRA notes that many participants, upon termination of employment, retirement, or a distribution-triggering event, will roll the assets to an IRA (rather than roll the assets to a new employer's plan or receive a taxable distribution).  When making this decision, a participant may rely on the advice of a registered representative of a broker dealer.  The advice typically involves a "securities transaction" subject to FINRA regulation, including the suitability standard.    

Suitability Standard.  Under FINRA Rule 2111, a recommendation or investment strategy presented by a broker or its representative must be suitable for the customer based on information (obtained through reasonable diligence) relating to the customer's investment profile, such as the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance and any other information the customer may disclose.  Moreover, the requirement of fair dealing is implicit in all broker broker-customer relationships. 

The Notice applies this suitability standard to a broker's recommendation that a retirement plan participant roll over plan assets to an IRA if it entails selling, purchasing or holding securities.  In addition, the information that the participant receives must be "fair, balanced and not misleading."  These standards apply regardless of whether the broker is considered to be a fiduciary for purposes of ERISA.  It remains the case, however, that communications limited to only educational information (similar to the DOL rule under which investment education will not give rise to fiduciary status) will not result in a "securities transaction" subject to the suitability standard.

Factors Relevant to Suitability. The Notice provides several factors to be considered in light of the investor's individual needs and circumstances which are relevant to any recommendation to roll over assets from a plan to an IRA:

• The increased range of investment options available under an IRA (as well as the benefits of low-cost institutional funds even if the options are more limited in the plan).

• The fees and expenses charged by the plan versus an IRA.

• The services provided under each option.

• The tax characteristics of investing in the plan versus an IRA, such as the ability to withdraw funds without penalty, the minimum distribution rules, and the ability to borrow funds.

• The legal protections available from creditors available to the plan versus an IRA.

• The different tax treatment afforded plan participants holding appreciated employer stock in a plan and those who transfer such stock to an IRA. 

The Notice indicates that these examples should not be considered an exclusive list of the factors that may be relevant when analyzing whether to roll plan assets into an IRA.  The Notice also recognizes that financial advisers have an economic incentive to encourage plan participants to roll over plan assets and requires brokerage firms to supervise the activities and communications of their representatives so that this conflict does not impair their judgment.  This means that broker dealers must consider marketing materials and written supervisory procedures in light of IRA cross-selling products and services.

Conclusion. The Notice is certainly another signal IRA rollover activity has risen to the top of the regulatory radar screen at not only the DOL, but FINRA and SEC.  It serves as a reminder that the standards and obligations of non-fiduciary broker dealer firms, though not on the same level as an ERISA fiduciary, are nonetheless substantive and in-place for the benefit of investors.  It further signals the general concerns held by the SEC with regard to the movement of assets from a plan to an IRA at retirement or upon separation of service.  Given the current review by DOL of the "fiduciary" regulation, and the questions around a common fiduciary definition for both DOL and SEC purposes, it remains to be seen how FINRA, DOL and the SEC will ultimately coordinate (or not) on the role of financial service providers with regard to the IRA rollover market.   

ERISA/Employee Benefits Legal Compliance Checklist

We've developed an ERISA and employee benefits legal compliance checklist to help you assess your benefits program and structure. Please take a few minutes for this important due diligence check. 

If you have any questions about the checklist and your answers, please contact me or your primary law firm contact. Even one poorly answered question could be very problematic, with significant cost and liability implications. Make sure that 2014 starts with your benefits in full legal compliance.   

Welfare Benefit Plans:

1. Do you have an ERISA-compliant plan document?
2. Do you have an ERISA-compliant summary plan description?
3. To the extent that the plans are self-insured, are they in writing?
4. Has consideration been given to the Medicare Part D requirements regarding required notification for prescription drugs and potential federal subsidies?
5. To the extent that there are more than 100 eligible employees participating in the plan, have Forms 5500 been filed annually and timely?
6. If you maintain a 125, flexible spending account, dependent care assistance or other cafeteria plan, is it in writing? When was it last updated? 
7. When were your COBRA notices last updated? Are such notices distributed timely and in compliance with the law?
8. Are your health plan documents, open enrollment forms and premium conversation documents updated to comply with the Health Care Reform rules?

Tax Qualified Plans: 

1. Has the plan document been amended for all the new tax and ERISA rules and requirements? 
2. When must your plan be filed for a favorable determination letter under the IRS' cycle requirements?
3. Has the plan received a favorable determination letter and/or does the employer have a copy of the opinion or a notification letter in the case of prototype plans?
4. Does the summary plan description accurately reflect the terms of the plan?
5. If there are more than 100 employees participating in the plan, does the Form 5500 contain the required audited financial statements?
6. Are employer contributions made timely and in accordance with the terms of the plan, and are employee elective deferral contributions (e.g. 401(k) and 403(b) contributions) made as soon as administratively practicable as required by law?
7. Are all nondiscrimination tests accurately performed, including controlled group testing?
8. How is the investment asset mix determined, modified, monitored and re-balanced? 
9. Who is rendering appropriate investment advice and is this entity a fiduciary? 
10. Has it acknowledged its fiduciary status in writing?
11. What are all the direct and indirect fees being paid from plan assets, including, but not limited to, revenue sharing? 
12. Has a reasonableness analysis been undertaken to determine if the plan is getting good value for the services it is paying for?
13. When was the last time an RFP was done vis-à-vis plan administration, investment, accounting and recordkeeping?
14. Are the plan and all fiduciaries appropriately bonded? 
15. Do the fiduciaries have liability insurance? 
16. Does the plan sponsor indemnify its fiduciary-employees and Board members?
17. Are you aware of and in compliance with all of the new fee disclosure requirements (under ERISA Section 408(b)(2) and 404(a)(5)) that became effective at the end of 2012?

Employee Plan Issues in General:

1. Do you have an employee handbook? 
2. When was your employee handbook last updated?
3. Are your leave of absence policies in writing and distributed (e.g., maternity/paternity, military leave, and other leaves of absence)?
4. What policies and procedures do you have in place with respect to same-sex spouses and domestic partners? 
5. Do you understand and are you complying with the tax ramifications concerning same sex and domestic partner benefit coverage?

Same-Sex Marriage

IRS Confirms Same-Sex Marriages Will Be Recognized for Federal Tax Purposes

IRS has issued guidance (Revenue Ruling 2013-17) confirming that same-sex couples will be considered married for federal tax purposes if they are married in a state or foreign country that recognizes same-sex marriages, regardless of where the couple resides.  In addition, IRS has released Frequently Asked Questions related to this guidance for same-sex spouses and group health plan sponsors. 

The guidance follows the Supreme Court's decision inUnited States v. Windsor that declared as unconstitutional Section 3 of the Defense of Marriage Act, which previously prevented the federal government from recognizing same-sex marriage.

According to the Revenue Ruling, which is generally effective September 16, 2013, but has some retroactive effects, group health plan sponsors must begin to treat all individuals in same-sex marriages as married for federal tax purposes.  In response, plan sponsors are advised to take the following steps:

• Stop imputing income for the value of employer-paid health care coverage provided to an employee's same-sex spouse;
• Allow pre-tax contributions through a cafeteria plan for an employee's share of the cost of group health coverage provided to his or her same-sex spouse;
• Make adjustments for income tax withholding that was over-withheld from an affected employee during the current year;
• File an amended payroll tax return to claim a refund of federal payroll taxes paid on previously imputed income and on after-tax employee contributions for all open years (the IRS intends to issue streamlined procedures for employers claiming refunds);
• Allow reimbursements of qualifying medical expenses of an employee's same-sex spouse (and spouse's children) from Health FSAs and HRAs; and
• Allow reimbursements of qualifying dependent care assistance expenses for an employee's disabled, same-sex spouse under a Dependent Care Assistance Plan ("DCAP"). 

Individuals may file amended tax returns based on this ruling for all open tax years.

The guidance does not address whether IRS's recognition of same-sex marriages is considered a change of status event under Section 125 of the Internal Revenue Code that would allow an employee to change his or her election mid-year to: (i) enroll a spouse in an employer-sponsored health and welfare plan or change benefit options, or (ii) increase Health FSA or DCAP contributions.  IRS, however, has indicated that it will issue additional guidance on the retroactive application of the Windsor decision to employee benefit plans and arrangements.

Revenue Ruling 2013-17 is available at:http://www.irs.gov/pub/irs-drop/rr-13-17.pdf, and the IRS FAQs regarding same-sex marriages are available at:http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Same-Sex-Married-Couples.  

IRS Notice Provides Procedures to Correct Overwithholdings and Overpayments Related to Same-Sex Spousal Benefits

The IRS has issued Notice 2013-61, which outlines special administrative procedures for employers to use to correct overwithholdings of income taxes and overpayments of payroll taxes for 2013 and prior open tax years with respect to employer-provided, same-sex spousal benefits.  This guidance supplements Revenue Ruling 2013-17, which clarified that under the Supreme Court's decision in Windsor, the IRS will recognize all legally-married, same-sex couples for federal tax purposes, regardless of where the couple lives. 

Correction Methods for 2013.  Notice 2013-61 offers the following alternatives for employers that have treated the value of same-sex spousal benefits as compensation on their Forms 941 for the first three quarters of 2013:

• Employers may correct overwithholding and overpayments for the first three quarters of 2013 on the fourth quarter's Forms 941 if employees are reimbursed for overwithholdings and overpayments by December 31, 2013.
• Employers that do not reimburse employees for the overwithholdings and overpayments by December 31, 2013 may file one Form 941-X for the fourth quarter of 2013 to correct FICA overpayments for all quarters in 2013.  This alternative allows employers to avoid having to file separate Forms 941-X for each quarter of 2013. 

Under the second alternative, however, employers cannot make an adjustment for income tax overwithholding.  Instead, employees will receive a credit for the overwithholding when they file their 2013 federal income tax returns.

Correction Methods for Prior Years 

2010 through 2012

For calendar years 2010 through 2012, Notice 2013-61 authorizes employers to file a single Form 941-X for the fourth quarter of the applicable year to correct for FICA overpayments made in any or all quarters of that year. 

While Notice 2013-61 allows employers to file only one Form 941-X to correct overpayments, it does not relieve employers of their obligation to file Forms W-2c (to allow employees to correct their prior income tax returns), obtain written consent from affected employees, and reimburse employees for FICA overpayments.

Procedural Issues.  The special administrative procedures provided in Notice 2013-61 are optional and are intended to relieve filing and reporting burdens associated with the retroactive application of Revenue Ruling 2013-17.  Employers may still use standard procedures for correcting income tax overwithholding and FICA overpayments.

All Forms 941 and Forms 941-X filed pursuant to Notice 2013-61 must include the name "WINDSOR" in dark, bold letters across the top of page one to alert the IRS that the forms are related to adjustments in response to Revenue Ruling 2013-17.

Recommendations.  In consideration of the guidance provided by Notice 2013-61, employers are advised to determine any income taxes that were overwithheld in 2013 and make the necessary corrections on the fourth quarter 2013 Form 941.  Employers should also consider whether it would be more advantageous to simply file refund claims for prior years or to take a credit.

IRS Notice 2013-61 is accessible at:http://www.irs.gov/pub/irs-drop/n-13-61.pdf.

DOL Guidance Confirms FMLA Leave Available to Same-Sex Spouses in States Recognizing Same-Sex Marriage

The DOL has issued guidance on the application of the Family and Medical Leave Act ("FMLA") to same-sex spouses.  In particular, the guidance provides that employees in same-sex marriages are eligible to take FMLA leave to care for their spouses only if they reside in a state that recognizes same-sex marriage.

Among other things, FMLA entitles eligible employees to 12 weeks' leave to care for a seriously ill or injured spouse or to deal with "exigencies" related to their spouse'smilitary deployment.  It also provides employees with up to 26 weeks' leave to care for a spouse who has a military service related illness or injury.

DOL's guidance comes in the wake of the Supreme Court's decision this past June in Windsor, which struck down the provision in the Defense of Marriage Act (DOMA) limiting the definition of "marriage" and "spouse" under federal laws to heterosexual marriages.

Current FMLA regulations say the term "spouse" only includes a spouse if the marriage is recognized under the laws of the state in which the employee resides.  However, while DOMA was in effect, the federal government would not recognize same-sex spouses.

DOL says the Supreme Court's decision means that married same-sex couples residing in states where same-sex marriage is recognized must now be afforded spousal FMLA rights.  On the other hand, employers are not required to make FMLA leave available to same-sex spouses who reside in a state that does not recognize same-sex marriage.

DOL Secretary Tom Perez recently commented that this guidance is "one of many steps" the agency will take to implement the Supreme Court's decision in Windsor, leaving open the possibility that current regulations will be changed to give all same-sex marriages FMLA rights, regardless of the state of residence.