IRS Details Retirement Plan Rules For Same-Sex Couples

The IRS has previously addressed unresolved questions about how the U.S. Supreme Court’s decision in United States v. Windsor applies to qualified retirement plans. That 2013 ruling concluded that the 1996 Defense of Marriage Act (DOMA) unconstitutionally denied same-sex couples the right to marry. While the decision directly affected federal treatment of same-sex married couples, it didn’t mandate that states recognize their marriages.

The ruling and qualified plans

In its original guidance issued following the Windsor decision, the IRS stated that qualified retirement plans must treat a same-sex spouse the same as opposite-sex spouses under federal tax laws relating to qualified retirement plans. And qualified plans must recognize a same-sex marriage that occurred in a jurisdiction that recognizes same-sex marriages, even if the state where the plan sponsor is based doesn’t recognize same-sex marriages.

Registered domestic partnerships and civil unions don’t qualify as “marriage” or create bona fide spouses for retirement plan rules. For example, a retirement plan isn’t required to provide a death benefit to a surviving registered partner, unless the deceased participant had instructed the plan to do so. Plans can make a surviving domestic partner the default beneficiary, absent any prior direction to the contrary from the deceased participant.

Effective date clarification

The original rules took effect Sept. 16, 2013, and are applied prospectively. However, some ambiguity remained regarding possible retroactivity of the date for recognition of the marital status of same-sex couples. In a subsequent set of IRS rules, plans aren’t required to recognize such marriages any earlier than June 26, 2013, the date of the Supreme Court’s ruling. The Sept. 16, 2013, effective date means that the IRS won’t penalize a plan that didn’t comply with the Windsor decision before that date, but the plan must still use the June 26 date as the starting point.

So when do plans need to amend their plan documents to reflect Windsor? IRS Notice 2014-19 set a Dec. 31, 2014, deadline for qualified plans that had formally excluded spouses of employees in same-sex marriages from the benefits given to spouses of heterosexual couples. For example, if your plan document defines “spouse” by referring to DOMA, or as a person of the opposite sex, you’ll need to amend your plan document. In a later Notice, 2014-37, the IRS stated that 401(k) or 401(m) safe harbor plans can adopt mid–plan year amendments to satisfy the requirements of Notice 2014-19. It’s best to consult with a benefits expert to make sure your plan complies in a timely manner.

Pre-Windsor marriages can be recognized

Plans that didn’t have provisions treating same-sex couples differently aren’t required to file a plan amendment. However, plans can opt to recognize as married same-sex couples who were married prior to that date, and amend their documents accordingly. But be cautious, because this involves some complexities and possible limitations.

The IRS warns that recognizing same-sex spouses for all plan purposes before June 26, 2013, may trigger requirements that are difficult to implement retroactively and may create unintended consequences. For example, the IRS points out that amending a plan permissively this way may affect ownership attribution rules that identify key employees and determine if corporations are members of a controlled group under the Internal Revenue Code.

If a plan satisfies applicable qualification requirements, choosing a pre–June 26, 2013, effective date won’t affect a plan’s qualification status. For example, according to the IRS, a plan sponsor may amend its plan to reflect Windsor earlier than June 26, 2013, solely with respect to qualified joint and survivor annuity and qualified preretirement survivor annuity requirements and, for those purposes, solely with respect to participants with annuity starting dates or dates of death on or after a specified date.

Sigh of relief

For the IRS to not require retroactive application of Windsor probably comes as a relief for many plan sponsors. It means that plans aren’t liable for death benefits to same-sex married couples when the death predated June 26, 2013. For example, it’s possible that beneficiary designations (for beneficiaries other than the same-sex spouse) made before that date may be invalid unless the same-sex spouse consented to the arrangement prior to that June date.

Also, if a plan participant retired before June 26, 2013, and began receiving a payout based not on a joint and survivor annuity schedule but instead on a 10-year certain and life annuity with a nonspouse beneficiary, the participant may need to change the beneficiary to the same-sex spouse, or that spouse would need to consent to the arrangement.

Get advice

Plan sponsors should consult with their professional administrators, consultant or legal counsel about possible implications of the rules with respect to pre–June 26, 2013, actions. An assessment by a professional is advisable to make sure your plan complies with the law.

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