Update on the Application of the Defense of Marriage Act Ruling
In an earlier article, “Impact of Defense of Marriage Act Ruling on Retirement Programs”, posted on July 25, 2013, I explained the U.S. Supreme Court ruling that declared that the section of the Defense of Marriage Act (DOMA) that defined “marriage” for federal law purposes as only being a legal union between a man and a woman was unconstitutional. The Court referred to persons who were legally married in states that permit same-sex marriage. At the time of the June 26, 2013 decision, 12 states and the District of Columbia recognized same-sex marriage. Today, 17 states and the District of Columbia do so and there is litigation pending in approximately 17 other states where non-recognition of same-sex marriage is being actively challenged.
This decision had an immediate effect on many federal laws, including the Internal Revenue Code (IRC) and Employee Retirement Income Security Act (ERISA), both of which govern employer retirement plans. At the time, there were many unknowns about just how that ruling would ultimately impact retirement plan administration.
The Internal Revenue Service (IRS) subsequently issued a “place of celebration” ruling in Rev. Ruling 2013-17, which was effective September 16, 2013. This Ruling concludes that for federal tax purposes, the terms “husband” and “wife” include an individual married to a person of the same sex if they were lawfully married in a state or jurisdiction whose laws authorize the marriage of two individuals of the same sex, and the term “marriage” includes such marriages of individuals of the same sex. The fact that the couple, once married, may reside in a state that does not recognize the validity of same-sex marriages does not matter. The Ruling also clarified that “marriage” does not include domestic partnerships or civil unions. However, this Ruling did not address the consequences of retroactive application or fully detail the impact to employers, employees and beneficiaries of employee benefit plans.
On April 4, 2014, the IRS issued Notice 2014-19, which provides additional guidance on many of the issues that were previously uncertain. The IRS also issued Frequently Asked Questions (FAQs) for retirement plans. One of the most important questions answered pertained to the timing of applying the new guidance. In general, the Notice provides that retirement plans are not required to recognize the same-sex spouse of a participant under a retirement plan prior to June 26, 2013. However, effective June 26, 2013, any retirement plan rules that apply to a married participant will be applied to a participant who has a same-sex spouse. Employers may also choose to apply the new rules retroactively for some or all purposes. Other key issues addressed in the Notice and FAQs are:
- The recognition of a same-sex spouse applies to 403(b) plans, but with only limited application if the 403(b) plan is not subject to ERISA.
- From June 26, 2013 to September 15, 2013, when determining if a participant is married, the employer need only comply with the “state of domicile” standard, where the same-sex spouse is only recognized if the individuals were legally married in a state that permits same-sex marriage AND the individuals also live in a state that recognizes same-sex marriage. On or after September 16, 2013, employers must comply with the “state of celebration” standard, which means that if a same-sex couple is legally married in a jurisdiction that recognizes marriage, they will be treated as married for federal tax purposes, regardless of where they live.
- Plans may need to be amended to comply with the new rules. If the plan refers to “spouse”, “married”, “husband/wife”, or other marital terms by referring to Section 3 of DOMA, or if the plan’s terms are otherwise inconsistent with the Supreme Court ruling and additional guidance, it will need to be amended to use other terms that do not draw a distinction between an opposite-sex spouse and a same-sex spouse.
- If the employer wants to retroactively apply the new spouse definition earlier than June 26, 2013 or chooses to use the “state of celebration” standard rather than the “state of domicile” standard for the period between June 26, 2013 and September 15, 2013, the plan will need to be amended to clarify those positions.
- Any necessary amendments must be adopted by the later of December 31, 2014 or the later of (a) the end of the plan year in which the change is effective or (b) the due date of the employer’s tax return for the tax year that includes the date on which the change is first effective. This means that calendar year plans must be amended by December 31, 2014, and fiscal year plans may have later amendment deadlines. The amendment deadlines are different for 403(b) and governmental plans.
WHAT SHOULD PLAN SPONSORS DO?
There are several sections of the IRC and ERISA that contain rules with respect to married participants in qualified retirement plans. With the new definition of “marriage”, plan sponsors should review their plan document to see if an amendment is necessary to bring it into compliance with the new spousal rules. Sponsors will also want to make sure they are operationally extending spousal rights to same-sex spouses under all areas of the plan that pertain to spouses. Sponsors should look particularly at the following:
- QDRO (Qualified Domestic Relations Order) language: How is Alternate Payee defined? Check any references to marital property rights for “marriage” definition that might be inconsistent with the new rules. The QDRO procedures may be written in the plan document, or the employer may have developed separate procedures to address the determination of whether a domestic relations order is a QDRO and for administering distributions under a QDRO.
- Employer Stock Ownership Plan (ESOP): Under Section 409(p), during a nonallocation year, no portion of the assets of the ESOP of an S Corporation may accrue to certain family members of disqualified persons. Under Section 409(n), the allocation or accrual of certain employer securities is prohibited for certain individuals, including the spouse of the seller and the spouse of any individual who owns 25% or more of the securities. Employers will want to make sure they are considering all spouses for these rules.
- Qualified Joint and Survivor Annuities (QJSAs): Some plans require distributions to be paid in the form of an annuity. Participants who elect to decline the annuity option must get spousal consent to waive the QJSA. Also, if a plan with a QJSA allows loans, then the plan must obtain the consent of the spouse of a married participant before making the loan. Plan sponsors will need to make sure that same-sex spouses are also considered when determining if proper consent was given in either of these instances.
- Highly Compensated Employees (HCEs) and Key employees: Spouses of certain individuals are included in determining who are the HCEs and Key Employees in a plan. Including same-sex spouses in these determinations may increase the participants that are classified as HCEs or Key Employees. These definitions are important for many required annual compliance tests, as well as control group determinations.
- Beneficiary designations: If a participant who is married names someone other than - or in addition to - his/her spouse as the primary beneficiary on the retirement plan account, the spouse must consent to that designation. Plan sponsors will want to make sure they have spousal consent from any same-sex spouse for any beneficiary designations that are affected. Likewise, most plan documents automatically distribute plan assets to a participant’s surviving spouse if the participant dies without naming a beneficiary. In determining whether there is a spouse that should receive the account, the plan sponsor will also want to consider whether there is a same-sex spouse. If the participant is divorced, it is assumed that there needs to be a legal divorce from the same-sex spouse.
- Required Minimum Distributions (RMDs): Spouses have additional rights in determining RMDs.
- Rollover Rules: Spouses have additional alternatives that are not available to non-spousal beneficiaries.
The new guidance does not require plan sponsors to notify plan participants of the new rules. However, if a plan amendment is required as described above, then a Summary of Material Modification (SMM) or a new Summary Plan Description (SPD) should be provided to participants to explain the change to the plan terms. In addition, it would be wise to communicate with participants about the new rules, especially with respect to beneficiary designations. For example, a participant in a same-sex marriage who currently has a child listed as the primary beneficiary needs to understand that under the new rules, his or her spouse must consent to that designation or it is invalid.
If plan terms designate that a particular state’s laws apply to the plan, and that state does not recognize same-sex marriages, the plan will violate the qualification requirements if the plan, in operation, does NOT recognize the same-sex spouse of a plan participant beginning June 26, 2013.
Should plan administrators request proof of marriage before processing a benefits claim or accepting a beneficiary form for a same-sex spouse? Plan administrators should not require proof of marriage from same-sex couples to the extent such proof is not required of opposite-sex couples. However, as a practical matter, this might be an opportune time for plan sponsors to review and possibly revise their documentation requirements if that seems prudent. It would certainly not be unreasonable to ask any participant who claims to be married or divorced to provide a proof of marriage and/or a divorce certificate.
One final note for consideration…the above IRS guidance provides that a retirement plan will not be treated as failing to meet the qualification requirements as long as the new definitions of “spouse” and “marriage” are applied as of June 26, 2013. But the IRS guidance does not provide relief to the plan from any individual who may seek to bring an assertion of spousal rights for retirement plan benefits that accrued before June 26, 2013. Any such claims would have to be addressed through the plan’s claim and appeals procedures or through the courts.
As of the date of this writing, the following states, plus the District of Columbia, expressly permit same-sex marriage: