Most Recent Notice Brings Clarification, Does Not Address All Questions
In 2013, we wrote about the far-reaching impact of the Windsor same-sex marriage ruling which touched more than 1,300 federal laws, including the Internal Revenue Code and Employee Income Security Act (ERISA). On April 4, 2014 the IRS published a new piece of guidance on the application of this decision to qualified retirement plans. Here’s what you need to know.
Soon after the Supreme Court decision, the IRS issued Revenue Ruling 2013-17 and a set of FAQs which provided clarification that effective September 16, 2013 the state of celebration, rather than the state of residence, would be the factor in the federal recognition of same-sex marriages. The ruling continued to say that same-sex couples are to be treated as married for all federal tax purposes where marriage is a factor. It further stated that individuals within registered domestic partnerships and civil unions would not be recognized as spouses; however employers could make domestic partners the default beneficiary.
New Guidance from the IRS
Notice 2014-14, issued on April 4, provided high level clarification for amendment requirements, effective dates, and how far back the Windsor decision had to be applied and could be applied. The latter had potential for significant consequences to some pension plans which had commenced payouts to participants and/or their same-sex spouses prior to June 26, 2013, the date of the Supreme Court’s decision.
To amend or not to amend? It all depends on the plan language. The guidance states that plans that have language which is inconsistent with the Windsor decision and related guidance need to be amended to reflect recognition of same-sex couples’ rights. For instance, if a plan that defines spouse or marriage with reference to Section 3 of DOMA, which defined marriage as a union of one man and one woman, or specifically excludes same-sex couples from receiving spousal benefits must be amended to remove those restrictions by December 31, 2014. On the other hand, plan documents that use terms and definitions which do not apply restrictions to same-sex couples do not need to be amended. For example, a plan may use the term spouse without a specific definition and define marriage as a legal union recognized in any jurisdiction; such plan language would not seem to be incongruent with the Windsor decision and subsequent guidance. (First Allied Retirement Services utilize plan documents which do not contain language that would conflict with the Windsor decision or subsequent IRS guidance and therefore do not need to be amended).
Effective Date of the Windsor Application
Qualified retirement plan operations must reflect the outcome of Windsor as of June 26, 2013. The IRS offered some relief: plans will not be penalized if they determined marital status by reference to the participant’s state of domicile before September 16, 2013. After that date, consistent with Notice 2013-17, a plan must recognize a participant’s same-sex marriage, regardless of whether the participant was domiciled in the state of marriage.
The IRS indicated that employers may retroactively apply the Windsor outcome for some or all purposes as long as the plan is properly amended. But the IRS cautioned that such retroactive application may result in unintended consequences that will be challenging for a plan sponsor to implement. Plans which give any retroactive effect to the Windsor outcome before June 26, 2013 must be amended to reflect that choice. The amendment should specify an effective date and should list the specific purposes for which same-sex marriages are recognized.
Plan Sponsor Checklist
The following are key issues a plan sponsor should review in light of the new guidance:
□ Are plan definitions consistent with the Windsor decision and Notice 2013-17?
□ Do you wish to apply the Windsor decision to any period before June 26, 2013?
□ Did the plan operate in compliance with the Windsor decision as of June 26, 2013?
□ If the plan amendment is required, execute it before December 31, 2014.
□ Does plan literature, e.g. Summary Plan Description, properly reflect the rights of same-sex couples?
While the new guidance offers some answers, it does not address many operational questions. We are continuing to monitor developments in this area and will keep you apprised when additional guidance is available. If you encounter circumstances which may be impacted by the Windsor decision and subsequent guidance, please reach out to your First Allied Retirement Services subject matter experts at firstname.lastname@example.org or (888) 926-0600.