News & Events Listings

On April 4, 2014, the IRS issued IRS Notice 2014-19 with new guidance to sponsors of qualified retirement plans on what steps they should take to ensure their compliance with the U.S. Supreme Court’s decision in U.S. v. Windsor ("Windsor"). By way of background, on June 26, 2013, the U.S. Supreme Court's decision in Windsor dramatically affected the rights of same-sex spouses under federal law, especially their rights under qualified retirement plans in which one of the spouses participates. The following article is intended to summarize some of the more important aspects of this most recent guidance on the impact of the Windsor decision on retirement plans. We start our discussion with a brief overview of the Windsor decision.

1. Q: What did the U.S. Supreme Court rule in Windsor?

A: The Supreme Court declared that Section 3 of the federal Defense of Marriage Act ("DOMA") was unconstitutional. This Section provided that only persons of the opposite sex could be recognized as “spouses” and “married” for purposes of federal law including the IRC and ERISA.

2. Q: Which States have, to date, recognized same-sex marriages for State law purposes?

A: As of April 15, 2014, the following 17 States and the District of Columbia now recognize same-sex marriages: California, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, Vermont, and Washington.

Courts in the following States have also now recognized same-sex marriages, but their holdings in this regard are being stayed pending final decisions from current appeals: Kentucky, Michigan, Ohio, Oklahoma, Texas, Utah, and Virginia. In addition to these seven states, it should be noted that there is continued judicial activity in states where same-sex marriages have not yet been officially recognized. So this list will need to be continually updated.

3. Q: What earlier guidance has the IRS issued on how the Windsor decision impacts retirement plans for participants having a same-sex spouse?

A: Rev. Rul. 2013-17 provided the initial guidance from the IRS on the impact of the Windsor decision. It was issued on August 29, 2013 with an application date of September 16, 2013. The principal holding in this Ruling establishes that the 200 references in the IRC and Regulations to the terms “spouse”, “marriage”, “husband”, and “wife” include individuals who are legally married to members of the same sex. This ruling also states that the determination of marital status is based upon the laws of the state where the marriage occurred. This is often referred to as the “place of celebration” rule. This ruling clarifies that legally married same-sex couples are treated as married for federal tax purposes regardless of their current state of domicile or employment. Also the Ruling explains that the term "marriage" does not include domestic partnerships or civil unions.

4. Q: So what new guidance was included in IRS Notice 2014-19?

A: As indicated above, the most recent guidance on the impact of the Windsor decision on qualified retirement plans was issued on April 4, 2014 as IRS Notice 2014-19. This Notice was also supplemented by FAQs published on the IRS website. The Notice addressed and provided much-needed information on three important topics:

  1. A non-exclusive list of some of the more significant retirement plan provisions affected by the Windsor decision.
  2. Additional guidance on the effective date of the Windsor decision for retirement plans.
  3. Issues on the need for and timing of formal retirement plan amendments to comply with the Windsor decision.

5. Q: Which significant plan provisions affected by the Windsor decision are specifically identified in IRS Notice 2014-19? 

A: Some of the more significant plan provisions involving spouses specifically identified in the Notice include the following:

  • Qualified Joint and Survivor Annuities ("QJSA")/Qualified Pre-Retirement Survivor Annuities ("QPSA") - Spouses of participants in certain retirement plans (principally defined benefit plans and/or money purchase pension plans) can share in a portion of the participant’s accrued benefits under the plan following the death of the participant through a QJSA or QPSA unless such rights have been affirmatively waived by the surviving spouse prior to the participant’s death;
  • Death Benefits Payable under a Profit Sharing Plan - Profit sharing plans including section 401(k) plans are exempt from the QJSA and QPSA provisions described above provided that upon death, the participant's undistributed accrued benefit is payable in full to the surviving spouse. The surviving spouse can affirmatively waive such benefit prior to the participant's death by consenting to the designation of a different beneficiary;
  • Required Minimum Distribution (“RMD”) and Roll-Over Provisions – Surviving spouses have additional distribution alternatives that are not available to non-spousal beneficiaries. These alternatives include provisions which allow the surviving spouse to roll over the benefit to their own IRA or qualified plan and not need to take an RMD until the year the participant would have turned age 70 ½.
  • ESOP Allocation Limitations - Spouses of participants who, in their own right, participate in an ESOP cannot share in allocations of employer stock under certain circumstances; and
  • Qualified Domestic Relations Orders ("QDROs") – Divorced spouses can be an alternate payee of certain plan benefits based on a court order or QDRO.

6. Q: What does IRS Notice 2014-19 have to say about the effective date of the decision in Windsor for qualified retirement plans?

A: As of June 26, 2013, the date of the Windsor decision, the guidance requires retirement plans to be administered to reflect the Windsor ruling but does not require plans to retroactively recognize same-sex spouses prior to that date. This is good news for employers that their plans should not have tax qualification issues relating to Windsor prior to the date of the decision.

For the period between June 26 and September 16, 2013 (the application date for Rev. Rul. 2013-17), compliance with Windsor is based upon the laws of the state in which the participant is “domiciled.” So just for this period, plans only had to recognize same-sex marriages of participants who were living in a state that allowed same-sex marriages.

Effective as of September 16, 2013, qualified retirement plans are required to recognize all legally married same-sex spouses based upon the laws of the state in which the marriage occurred -- even if currently living in a state that does not recognize same-sex marriages.

Finally the guidance provides that a plan sponsor can select an earlier date than June 26, 2013 to apply the Windsor decision if the plan is properly amended. However, the IRS has cautioned plan sponsors opting to go with an earlier date that this route may trigger requirements that are difficult to implement retroactively and may create unintended consequences. The IRS did clarify however that “provided applicable qualification requirements are otherwise satisfied, a plan sponsor’s choice of a date before June 26, 2013, and the purposes for which the plan amendments recognize same-sex spouses before June 26, 2013, do not affect the qualified status of the plan."

7. Q: What Plan amendments are required under IRS Notice 2014-19 as a result of the Windsor decision?

A: Not all qualified retirement plans will need to be amended. The Notice addresses two scenarios under which plan amendments will be required. First, if the terms of the plan expressly define “marriage” by reference to DOMA or limit the term “spouse” to an individual of the opposite sex, the Notice requires that the plan be amended to comply with the Windsor decision. Secondly, if the plan wants to apply the rules with respect to married participants in a manner that reflects the outcome of Windsor for a period before June 26, 2013, then the Notice requires that the plan be amended to specify the date and the purposes for which the rules are to be applied retroactively.

In either case, the Notice specifies when such amendments are required to be adopted. Generally if plan amendments are required they will need to be adopted by December 31, 2014. Depending upon the plan amendment, this can be very complex and plan Counsel should be consulted on any plan amendments and their timing. Of course the Plan will need to continue to be operated based on the dates discussed in Q&A 6 above.

8. Q: So what should plan sponsors be doing now in light of IRS Notice 2014-19?

A: Plan sponsors should be making the following decisions and taking the following steps:

  • Systems and procedures should be reviewed to make sure that all participants with same-sex spouses have been identified and that this information will be collected for all new participants.
  • The Plan Sponsor should decide whether the holding in Windsor is to be effective prior to June 26, 2013, and, if so, how far back and for what purposes;
  • Otherwise the Plan Sponsor should decide whether the "place of celebration" or “place of domicile" rule applies from June 26, 2013 to September 15, 2013. From and after September 16, 2013, the "place of celebration" rule must apply in determining the “married" status of a participant;
  • Any required plan amendments should generally be adopted by December 31, 2014. Summary Plan Descriptions should be updated. Plan Counsel should be consulted regarding the required plan amendments.
  • If the plan requires amendment, employers should determine that the plan has been operating in compliance with any such amendment as of the proper effective date. If not, plan corrections should be made using one of the IRS correction programs.
  • Retirement plan enrollment packages, beneficiary designation forms, and distribution information should be reviewed to ensure they have been properly updated for Windsor.

For more information, please contact your local UHY LLP professional.