Same-Sex Married Couples and Retirment Plans

04/23/2014

On April 4, 2014, the Internal Revenue Service issued Notice 2014-19 and a set of Frequently Asked Questions ("Notice").  The Notice is intended to clarify certain tax implications in light of the Supreme Court’s decision in Windsor v. U.S.  The Notice  requires plans to be administered to reflect the Windsor ruling effective as of June 26, 2013, but does not require plans to retroactively recognize same-sex spouses prior to that date.  In addition, the IRS clarified the requirements for any Windsor-related plan amendments.

In Windsor, the Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional.  Section 3 of DOMA previously had provided that, for purposes of all federal laws, the word “marriage” means “only a legal union between one man and one woman as husband and wife,” and the word “spouse” refers “only to a person of the opposite-sex who is a husband or wife.”

Prior to the Notice, the IRS had issued Revenue Ruling 2013-17 providing that same-sex couples legally married in a jurisdiction with laws authorizing same-sex marriage will be treated as married for federal tax purposes, regardless of whether the couple resides in a state where same-sex marriage is recognized.  This IRS approach recognizing same-sex marriages based on the “state of celebration” took effect September 16, 2013.  At that time, the IRS promised to issue additional guidance regarding the retroactive impact of the Windsor decision.  The Notice issued on April 4th now addresses the retroactivity issue.  

The Notice clarifies that, effective as of June 26, 2013, retirement plans must be administered in a manner that reflects the Windsor ruling.  Notably, the Notice provides that plans are not required to retroactively recognize same-sex spouses prior to that date.  In addition, plans that initially applied a “state of residence” approach, as opposed to the IRS’ state of celebration approach, are not required to retroactively adopt the state of celebration approach prior to September 16, 2013.  A state of residence approach means the plan extended spousal rights and benefits only to same-sex spouses legally married and residing in a jurisdiction where same-sex marriage is legal or recognized.

Not requiring retirement plans to retroactively recognize same-sex spouses prior to the June 26, 2013 effective date of the Windsor ruling mitigates potential plan liabilities for death benefits and other benefits for same-sex spouses prior to that date.  Specifically, unless a plan sponsor voluntarily elects to recognize same-sex spouses prior to that date, the IRS guidance relieves the plan sponsor from a dilemma of either (1) reissuing benefit election paperwork to participants with same-sex spouses who elected benefits prior to that date or (2) risking plan disqualification.  In addition, plans are not required to recognize a same-sex spouse for purposes of death benefit payments (such as the qualified pre-retirement survivor annuity (QPSA) under a defined benefit plan) prior to that date.

Below are some of the key implications plan sponsors will need to consider in extending spousal rights and benefits under their retirement plans to same-sex spouses.

A participant's same-sex spouse must be recognized as the default beneficairy under the plan in the event the participant fails to designate a beneficiary or the beneficiary predeceases the participant.

A participant's same-sex spouse must consent to the participant's designation of a beneficiary other than the same-sex spouse. Any beneficairy designatios made prior to June 26, 2013, are now invalid without a same-sex spouse's ocnsent ot the designation.

Plans that permit hardship withdrawals must consider a participant's same-sex spouse in determining whether the participant is eligible to take certain withdrawals, such as medical, tuition or funeral expenses, for the same-sex spouse.

Same-sex spouses who divorce may enter into a qualified domestic relations order (QDRO) to divide retirement plan assets.

Same-sex spouses have the right to directly roll over eligible rollover distributions and must be notified of their rollover rights.

Required minimum distributions may need to be recalculated for participants with a same-sex spouse and can be delayed for a surviving same-sex spouse.

Amendments are not required for plans that define marriage or spouse by general reference to federal law or in a manner that is otherwise not inconsistent with Windsor.  However, plans that define “marriage” by reference to DOMA or that limit “spouse” to an individual of the opposite-sex must be amended to reflect the Windsor ruling and related IRS guidance.  Plans also need to be amended if spousal rights and benefits were administered in a manner that reflects the outcome of Windsor prior to June 26, 2013.  All Windsor-related amendments generally must be adopted by December 31, 2014.