1. IRS Guidance
Shortly after the Windsor decision was released in 2013, the IRS published Revenue Ruling 2013-17, which adopted a “place-of-celebration” rule for purposes of applying the terms “spouse” and “marriage” under Federal tax law to an individual considered to be married to a person of the same sex. Under the place-of-celebration rule, these terms include an individual lawfully married to a person of the same sex under state law, determined on the basis of the law of the state in which the marriage was entered into and not the law of the state in which the individual is domiciled. However, individuals who have entered into a registered domestic partnership, civil union or other similar formal relationship that is recognized, but not called “marriage,” under state law are not treated as married. The “place of celebration” rule applied prospectively as of September 16, 2013 for all Federal tax purposes, including qualified retirement plans, such as 401(k) and pension plans.
The IRS subsequently published further guidance on the application of Windsor in Notice 2014-19 and a set of Frequently Asked Questions (FAQs). Under this guidance, qualified retirement plans whose definitions of “spouse” or “marriage,” or other provisions, are inconsistent with Windsor and subsequent IRS guidance may need to be amended by December 31, 2014.
2. IRS Guidance Clarifies Scope of Required Changes in Plan Administration
- The updated IRS guidance indicates that qualified retirement plans must be operated consistently with Windsor from June 26, 2013, except that plans could apply a “place-of-residence” rule rather than a place-of-celebration rule until September 16, 2013. Plans are not required to recognize same-sex spouses retroactively for periods prior to June 26, 2013.
- Operating consistently with Windsor means that any retirement plan qualification rule that applies because a participant is married must be applied to participants who are lawfully married to an individual of the same sex under state law. Examples of changes that may be required include the following:
- Same-sex spouses who divorce may enter into qualified domestic relations orders to divide retirement plan assets.
- Same-sex spouses must be provided with notification of their rights to directly roll over eligible rollover distributions.
- Required minimum distributions for participants with same-sex spouses may need to be recalculated and may be delayed if there is a surviving same-sex spouse.
- For defined contribution plans, same-sex spouses of participants must be recognized as their default beneficiaries, must consent to participants’ designations of beneficiaries other than their same-sex spouses or to loans (if spousal consent is required for loans) and must be considered in determining the participant’s eligibility for hardship withdrawals that relate to the same-sex spouse.
- For defined benefit plans, spousal survivor benefits in the form of qualified joint and survivor annuities (QJSAs) or qualified optional survivor annuities (QOSAs) and qualified pre-retirement survivor annuities (QPSAs) must be extended to same-sex spouses, and, if the plan offers optional payment forms, then same-sex spousal consent must be obtained to a participant’s election of a payment form payable to a beneficiary other than the spouse.
3. Plan Amendments May Be Needed By December 31, 2014
- Qualified retirement plans that define a marital relationship inconsistently with the outcome of Windsor or subsequent IRS guidance must be amended by the later of (1) December 31, 2014 or (2) the usual deadline for plan amendments, which is generally the later of the end of the plan year in which the change is first effective or the due date of the employer’s tax return for the tax year that includes the date the change is first effective.
- If a qualified retirement plan defines a marital relationship in a manner that is not inconsistent with Windsor or subsequent IRS guidance, then no amendment is required so long as the plan is operated in accordance with IRS guidance. For example, if “spouse” and similar terms are used in a plan without distinguishing between same-sex spouses and opposite-sex spouses, an amendment generally will not be needed.
- Plan sponsors may, but are not required to, reflect the outcome of Windsor for periods earlier than June 26, 2013. The IRS cautioned, however, that recognizing same-sex spouses for all purposes on a retroactive basis might trigger requirements, such as ownership attribution rules, that are difficult to implement retroactively. If a plan is operated to reflect the outcome of Windsor for periods earlier than June 26, 2013, the plan document must be amended to reflect such operation by the December 31, 2014 deadline described above.
- Single employer defined benefit plans may be amended to implement the outcome of Windsor and subsequent IRS guidance for periods after June 26, 2013 regardless of whether the plan’s adjusted funding target attainment percentage is otherwise sufficient. Such amendments are exempt from the general requirement of Section 436(c) of the Internal Revenue Code of 1986, as amended, that any amendment increasing the liabilities of a plan may take effect only if the plan’s adjusted funding target attainment percentage is sufficient or if the employer makes an additional contribution.