On Friday, April 4, 2014, the Internal Revenue Service (“IRS”) issued Notice 2014-19 (the “Notice”) and a set of six frequently asked questions (“FAQs”), providing guidance on when qualified retirement plans must start recognizing same-sex spouses for federal tax purposes following the June 26, 2013 United States Supreme Court decision in U.S. v. Windsor and when plans must be amended to conform their provisions to the decision. Windsor held unconstitutional Section 3 of the Defense of Marriage Act (“DOMA”), which prohibited the recognition of same-sex marriages for all federal purposes, including federal tax law and ERISA. Prior to the Windsor opinion, qualified plans were barred from recognizing same-sex marriages for many purposes. (For more information on specific qualified plan rules impacted by the Windsor decision, please see our July 2013 Benefits Report and our August and September 2013 Special Alerts).
Windsor made it clear that state law governs whether a person is considered “married” for qualified plan purposes, but left a number of questions unanswered for plan sponsors, including:
- If a person resides in one state but was married in another, and those two states’ laws conflict on the issue of same-sex marriage, which state’s law must a plan administrator apply in determining whether that person is married for plan purposes?
- Does the Windsor decision apply retroactively and, if it does, must a plan administrator go back and redetermine some or all claims decisions involving participants in same-sex marriages?
The IRS was swift to address the issue of conflicting state laws, and on September 16, 2013, published Revenue Ruling 2013-17, which held that, for federal tax purposes, the validity of a same-sex marriage is governed by the laws of the state in which the marriage took place.
Notice 2014-19 provides awaited guidance and relief on the issue of retroactivity. The Notice also specifies effective dates for operational compliance with Windsor and Revenue Ruling 2013-17, and sets deadlines for the adoption of any plan amendments necessary to conform to Windsor.
Plan Operations and Effective Dates for Windsor and Revenue Ruling 2013–1H
When a new law is enacted or a new regulation is issued, the law or regulation ordinarily will state its effective date and may even set a deadline for adopting conforming plan amendments. But when a court changes the law, it is not always clear when the change is to take effect. And when the U.S. Supreme Court declares a law unconstitutional, as in Windsor, one could argue that the change applies retroactively, that is, as if the unconstitutional law had never been enacted. Fortunately, the IRS has authority under Internal Revenue Code (“Code”) section 7805(b) to relieve taxpayers from the adverse impact of a retroactive change in federal tax law.
Under the authority of Code section 7805(b), the Notice provides that qualified plans will not be required to apply Windsor retroactively for federal tax purposes. In this regard, the Notice sets two separate effective dates, September 16, 2013 (the date Revenue Ruling 2013-17 was published) and June 26, 2013 (the date of the Windsor decision). Beginning September 16, 2013, qualified plans must recognize a same-sex marriage that is valid under the laws of the state in which the marriage took place, even if the marriage is not recognized as valid in the participant’s state of residence. For the period from June 26, 2013 to September 16, 2013, a plan need only recognize a same-sex marriage if it is valid under the laws of the state in which the participant resides. For this interim period, plans have the option of recognizing all lawfully contracted same-sex marriages whether or not the state where the participant resides recognizes out-of-state same-sex marriages. The FAQs confirm that a plan cannot apply the laws of some other state (e.g., under a choice of law provision) to determine the validity of a participant’s same-sex marriage.
Although not entirely clear from the Notice, the FAQs suggest that it should be reasonable for plans to continue paying benefits in the same form to any participant in a same-sex marriage who was in pay status (receiving benefit payments) as of June 26, 2013. The FAQs state that a plan sponsor may choose to provide new rights or benefits to participants in same-sex marriages to make up for benefits that previously were not available to those participants because of DOMA. For example, a plan may provide participants in pay status a new opportunity to elect a qualified joint and survivor annuity (“QJSA”). If a plan permits such an election, the plan should be able to condition the availability of the election on the participant’s agreement to repay to the plan the difference between the amount that was paid to the participant under the prior benefit election and the amount that could have been paid to the participant under the new election. For example, QJSA payments generally are lower than single life annuity payments (unless the QJSA is subsidized) because a QJSA continues paying benefits to a participant’s surviving spouse after the participant’s death. Thus, it should be reasonable to require repayment from a participant who elects to convert a single life annuity to a QJSA.
The Notice provides that plans can recognize same-sex marriages as of an earlier date than June 26, 2013, but points out that doing so may be administratively challenging and could raise compliance issues. The FAQs recognize that compliance issues resulting from an amendment to conform to Windsor (i.e., to recognize same-sex marriages as of June 26, 2013) can be corrected using principles similar to those found in the Employee Plans Compliance Resolution System, Revenue Procedure 2013-12 (“EPCRS”). Presumably, such principles also could be used to correct compliance issues if a plan sponsor chooses to recognize same-sex marriages as of a date before June 26, 2013. But that may be easier said than done.
Plan sponsors should carefully evaluate the cost and complexity of any necessary corrections before deciding whether to apply Windsor retroactively. For example, if a participant who is receiving a single-life annuity was in a same-sex marriage on the participant’s annuity starting date, and the plan did not require spousal consent to the participant’s election of that form of benefit (requiring spousal consent to such an election could have violated federal law as constituted prior to Windsor), the failure to obtain spousal consent could be remedied under EPCRS by obtaining the spouse’s consent now. However, if the spouse does not provide consent (for whatever reason — perhaps the couple is now divorced), it might be necessary to convert the participant’s single life annuity to a QJSA, a form of benefit for which spousal consent is not required, and require the participant repay a resulting benefit overpayment. Similarly, it could be difficult to correct a failure to obtain spousal consent to a participant loan, or to a deceased participant’s designation of a beneficiary other than his or her same-sex spouse. Moreover, few plan sponsors are able to identify all employees who are in same-sex marriages. As a result, in addition to the burden of correcting known compliance issues, a blanket rule recognizing all same-sex marriages as of a date earlier than June 26, 2013 could create latent compliance problems that cannot be corrected. Such practical considerations may limit the extent to which plan sponsors can apply Windsor retroactively.
Questions remain regarding the interpretation and application of these effective dates. For example, certain types of qualified plans must pay a married participant’s benefits in the form of a QJSA, under which the plan pays a lifetime monthly benefit to the participant and, after the participant dies, to the participant’s surviving spouse. To elect a different form of benefit, the participant must have spousal consent. Because the “spouse” (usually) is the person to whom the participant was married on his or her annuity starting date, one might assume that a plan can use the annuity starting date as the reference point for compliance with Windsor, that is, a plan can recognize the same-sex marriage of any participant whose annuity starting date is on or after June 26, 2013, and follow DOMA with respect to participants whose annuity starting dates precede June 26, 2013. The Notice does provide support for this position. An example in Q&A-3 of the Notice states:
- For the period before June 26, 2013, a plan sponsor may choose to amend its plan to reflect the outcome of Windsor solely with respect to the QJSA and QPSA requirements of section 401(a)(11) and, for those purposes, solely with respect to participants with annuity starting dates or dates of death on or after a specified date.
However, many plans permit a participant to elect a retroactive annuity starting date (“RASD”), that is, one that predates his or her benefit application, sometimes by several years. In such plans, it may be possible for a participant who applied for benefits or received his or her first benefit payment after June 26, 2013 to have elected a pre-Windsor annuity starting date. Under the complex spousal consent rules applicable to RASDs, in such cases, a participant who is married on the date his or her first benefit payment is scheduled to be made must obtain spousal consent to elect a RASD or to receive benefits in a form other than a QJSA. Thus, by analogy, one could conclude that a participant in a same-sex marriage who wishes to elect a RASD that predates Windsor must obtain his or her same-sex spouse’s consent to that election.
A plan must be amended, effective as of the operational compliance dates described above, if (i) its terms are inconsistent with Windsor or Revenue Ruling 2013-17, or (ii) the plan sponsor elects to recognize same-sex marriages as of a date earlier than June 26, 2013 for some or all plan purposes.
A plan amendment is necessary if a plan defines “marriage” or “spouse” by reference to DOMA or otherwise limits recognition of marriages to opposite-sex couples. The FAQs confirm that a retroactive amendment to conform will not affect a plan’s qualified status if the amendment “is implemented using principles similar to those in the [EPCRS].” However, a plan amendment may not be necessary if the plan does not distinguish between same-sex and opposite-sex marriages. For example, a plan might not define the terms “marriage” or “spouse” or might define those terms by reference to “federal law.” Even if a plan does not contain any terms that conflict with Windsor or Revenue Ruling 2013-17, plan sponsors may wish to consider adopting a clarifying amendment for administrative purposes.
Importantly, defined benefit plans that are subject to funding-related plan amendment restrictions under Code sections 436 (applicable to single-employer plans) or 432 (applicable to multiemployer plans) may be amended to recognize all same-sex marriages only as early as June 26, 2013 without being considered to violate such restrictions.
If a plan is amended to recognize same-sex marriages as of a date earlier than June 26, 2013, the amendment should specify the effective date(s) of the amendment and the purposes for which the plan will recognize same-sex marriages. In addition, any corrective action necessary to implement the amendment should be described in detail either in the amendment or in a separate administrative procedure. As discussed above, before adopting such an amendment, plan sponsors should carefully evaluate whether an earlier effective date would create administrative difficulties or cause the plan to violate any qualification rules, and should be cognizant of the cost and complexity of any plan corrections necessary as a result of the amendment.
Plan Amendment Deadline
If a plan amendment is required, the deadline to adopt the amendment for all but a handful of plans is December 31, 2014. If the sponsoring employer’s income tax return for the year that includes June 26, 2013 is due after December 31, 2014, the amendment deadline for qualified plans is the due date of the employer’s tax return. Similarly, if the Form 5500 for the plan year that includes June 26, 2013 for a qualified plan with more than one participating employer is due after December 31, 2014, the amendment deadline is the due date of the plan’s Form 5500. For governmental qualified plans that must be amended by a legislative body, the amendment deadline is the last day of the first legislative session that ends after December 31, 2014.
The FAQs state that these deadlines do not apply to Code section 403(b) plans, and that such plans must instead be amended by the deadline specified in Section 21 of Revenue Procedure 2013-22. Because that revenue procedure only applies to pre-approved plans, it is not entirely clear what, if anything, this statement means with respect to individually designed 403(b) plans. However, IRS Announcement 2009-89 provides that such plans that apply for an IRS determination letter (when the determination letter program is made available to 403(b) plans) will have a remedial amendment period in which to correct plan defects.
A Note Regarding ERISA Claims
The Notice does not necessarily protect a plan from a civil action brought under Title I of ERISA to enforce a benefits claim by a participant in a same-sex marriage who retired before June 26, 2013 (or the surviving spouse of such a participant who retired or died before that date). See Swede v. Rochester Carpenters Pension Fund (2d Cir. 2006) 467 F.3d 216. The surviving spouse of such a participant might claim, for example, that because they were married when the participant’s benefits commenced, those benefits should have been paid in the form of a QJSA or, if the participant died before June 26, 2013, that the surviving spouse is entitled to a qualified preretirement survivor annuity (“QPSA”) or a death benefit, which the plan may already have paid to a different beneficiary. However, such claims may very well be viewed as meritless by the courts because the law in effect before the Windsor decision prohibited qualified plans from recognizing same-sex marriages for many purposes. Courts should be loathe to penalize plan sponsors for following the law in effect at the time a claims decision was made, particularly where recognizing a same-sex marriage would require a plan to pay benefits twice. Furthermore, many plan sponsors adopted plan provisions prior to Windsor that were designed to provide the same or similar benefits to same-sex and opposite-sex married couples (to the extent permitted by federal law). Given these efforts, and the operational challenges associated with applying Windsor retroactively, plan sponsors should consider whether the cost of applying Windsor prior to the effective dates mandated under Notice 2014-19 will outweigh any possible exposure to civil claims.