Retirement Plan Administrators: Compliance with Windsor Ruling Fast Approaching
As of December 31, 2014, benefit plans that wish to maintain tax qualified status must comply with the IRS guidance with respect to last year’s Supreme Court decision United States v. Windsor, 133 S. Ct. 2675 (U.S. 2013), which reversed Section 3 of the Defense of Marriage Act (DOMA) and required that legal same-sex marriages be treated equally for federal tax purposes.
The Supreme Court ruled in its Windsor decision that Section 3 of DOMA, which prevented the federal government from recognizing marriages of same-sex couples, was unconstitutional. The ruling paved the way for the recognition of same-sex marriages for Federal tax purposes, concluding the tax definition of marriage to be all same-sex couples married in any state that legally recognizes their union, even if a couple’s place of work, residence, or plan administration is located in a state that does not legally recognize same-sex marriages.
Most plans whose participants have been directly affected by this ruling have been updated, since, as IRS guidelines state, their plans needed to provide benefits by June 26, 2013 (if the same-sex couple plan participant lived in a state that legally recognized the marriage), or by September 16, 2013 (whether or not the state recognized the plan participant’s marriage in another state). For plan participants still in the process of reviewing their terms, required amendments must be adopted by the later of December 31, 2014, or the applicable date under the IRS’ general amendment guidance for qualified retirement plans.
The guidelines explain that, to be compliant with IRS requirements, plan document and summary plan description language (even for those plans without married same-sex participants), must not conflict with the Windsor-broadened definition of marriage. Several Internal Revenue Code sections provide particular guidance with respect to married participants in qualified retirement plans, some of which include:
- Under Section 401(a)(11), certain qualified retirement plans must provide a qualified joint and survivor annuity (QJSA) upon retirement to married participants (and generally must provide a qualified preretirement survivor annuity (QPSA) to the surviving spouse of a married participant who dies before retirement). If a plan is subject to these rules, the QJSA (or QPSA) may be waived by a married participant only with spousal consent pursuant to Section 417. If such a plan permits loans to participants, then Section 417(a)(4) requires a plan to obtain the consent of the spouse of a married participant before making a loan to the participant.
- Under Section 401(a)(11)(B)(iii), certain qualified defined contribution retirement plans are exempt from the QJSA and QPSA requirements provided that a married participant’s benefit is payable in full, on the death of the participant, to the participant’s surviving spouse, unless the surviving spouse consents to the designation of a different beneficiary.
- Under the required minimum distribution rules of Section 401(a)(9) and the rollover rules of Section 402(c), additional alternatives are provided for surviving spouses that are not available to non-spousal beneficiaries.
- Under Section 1563(e)(5), generally a spouse is treated as owning shares owned by the other spouse for purposes of determining whether corporations are members of a controlled group under Section 414(b).
- Under Section 318(a)(1), generally a spouse is treated as owning shares owned by the other spouse for purposes of determining whether an employee is a key employee under Section 416(i)(1), including whether an employee is considered a 5% owner.
For a complete list of Code sections and further detail on the Windsor decision, click here. Additional IRS guidelines for retroactively addressing same-sex marriage participants will be forthcoming, according to IRS Notice 2014-19.
What Does CohnReznick Think?
Although some plans may not require amendments because their provisions or language already conform or are neutral enough to conform with post-Windsor guidance, it is imperative that all plan administrators review their plan documents and summary plan description to ensure compliance with the new IRS plan requirements prior to December 31, 2014.
For more information on compliance with the Windsor ruling, please contact Kim Brandley, Partner, at 732-380-8618.
To learn more about CohnReznick’s Employee Benefit Plan Practice, visit our website.
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