In Notice 2014-19 (the “Notice”) and accompanying Frequently Asked Questions posted on its website (the FAQs), the Internal Revenue Service (the “IRS”) provides guidance on the application of the Supreme Court’s decision in United States v. Windsor (“Windsor“) and the holdings of Rev. Rul. 2013-17 to the treatment of same-sex marriages by a multiemployer pension plan (and any other tax-qualified retirement plan).
BACKGROUND ON SAME-SEX MARRIAGE ISSUE
Prior to Windsor , section 3 of the Defense of Marriage Act (“DOMA”) prohibited the recognition of same-sex spouses for purposes of Federal tax law. Windsor ruled that section 3 is unconstitutional. Based on this decision, Rev. Rul. 2013-17 held the following:
(1) For Federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” “wife” : (a) include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes such a marriage between individuals of the same sex and (b) do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term “marriage” does not include such formal relationships.
(2) For Federal tax purposes, the IRS adopts a general rule recognizing a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex, even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.
These holdings apply to a multiemployer pension plan, prospectively as of September 16, 2013.
PLAN PROVISIONS AFFECTED
Very briefly, the Windsor outcome will affect any plan provision that considers a participant’s marital status, such as those pertaining to qualified joint and survivor annuities (“QJSAs”), qualified preretirement survivor annuities (“QPSAs”), beneficiary designations, loans, section 415 limits, incidental death benefit requirements, minimum required distributions, rollovers, safe harbor hardship withdrawals, qualified domestic relations orders (“QDROs”) and stock ownership attribution rules.
RULES UNDER THE NOTICE
The Notice establishes the following rules for a multiemployer pension plan:
Uniform Treatment. Any retirement plan qualification rule, under section 401(a) of the Internal Revenue Code (the “Code”), that applies because a participant is married must be applied with respect to a participant who is married to an individual of the same sex. For example, a participant in a plan subject to the rules of section 401(a)(11) of the Code who is married to a same-sex spouse cannot waive a QJSA without obtaining spousal consent pursuant to section 417 of the Code.
Mandatory Effective Date. Plan operations must reflect the outcome of Windsor as of June 26, 2013. A plan will not be treated as failing to meet the requirements of section 401(a) of the Code merely because it did not recognize the same-sex spouse of a participant as a spouse before June 26, 2013.
Amendment Prior To Mandatory Effective Date. A plan will not lose its qualified status due to an amendment to reflect the outcome of Windsor for some or all purposes of the plan and the Code as of a date prior to June 26, 2013, if the amendment complies with applicable qualification requirements (such as those in section 401(a)(4)). For example, 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.
Transition Rule. A plan will not be treated as failing to meet the requirements of section 401(a) merely because the plan, prior to September 16, 2013, recognized the same-sex spouse of a participant only if the participant was domiciled in a state that recognized same-sex marriages.
SPECIFIC APPLICATION UNDER THE FAQs
The FAQs provide guidance on specific applications of the Windsor decision, Rev. Rul. 2013-17 and the Notice (together, the “Notice Requirements”) to a multiemployer pension plan:
Particular Rule For Beneficiary Designations. In a profit-sharing or stock bonus plan, to the extent the section 401(a) qualification rules require a married participant’s spouse to be the participant’s beneficiary with respect to all or part of the participant’s benefits (unless the spouse consents to the participant’s designation of another beneficiary), the plan must treat a participant who is lawfully married on the date of death to an individual of the same sex as married for purposes of applying those qualification rules with respect to a participant who dies on or after June 26, 2013. This applies regardless of any conflicting plan terms and regardless of any prior beneficiary or other designation to which the participant’s spouse has not consented that specifies an individual other than the participant’s spouse to receive those benefits (except as provided in a QDRO).
State Law Not Applicable. If a plan’s terms designate a particular state’s laws as applying to the plan, and that state does not recognize same-sex marriage for purposes of applying state law, it is not permissible , on and after June 26, 2013, for the plan to be operated in a manner that does not recognize a participant’s same-sex spouse with respect to the section 401(a) qualification requirements which apply to married participants. Thus, if-on or after June 26, 2013- a plan administrator does not recognize the participant’s same-sex spouse for purposes of the plan provisions that are required under section 401(a) because a plan administrator interprets the terms of the plan by applying a designated state’s laws (such as under a plan’s choice of law provision) to identify a participant’s marital status, then the plan would violate the qualification requirements of section 401(a).
Retroactive Application of Amendments. A plan that is retroactively amended to be consistent with the Notice Requirements will not fail to retain its qualified status if the retroactive amendment is implemented using principles similar to those in the Employee Plans Compliance Resolution System (the “EPCRS”), as set forth in Rev. Proc. 2013-12. For example, if the plan is retroactively amended to apply the spousal consent rules under sections 401(a)(11) and 417 consistently with the Notice Requirements, the plan may obtain spousal consent to remedy a prior lack of spousal consent under the principles described in section 6.04(1) of Rev. Proc. 2013-12.
New Rights. In light of the Windsor decision, a plan sponsor may wish to amend a plan to provide new rights or benefits with respect to participants with same-sex spouses – such as an amendment that provides those participants with a new opportunity to elect a QJSA – to make up for benefits that were not previously available to those participants. Such an amendment must comply with the applicable qualification requirements (such as section 401(a)(4)).
The Notice requires that amendments be adopted by a multiemployer pension plan as follows:
(1) If the plan’s terms with respect to the requirements of section 401(a) define a marital relationship by reference to section 3 of DOMA or are otherwise inconsistent with the outcome of Windsor or the guidance in Rev. Rul. 2013-17 or the Notice, then an amendment to the plan that reflects such outcome or guidance must be adopted.
(2) An amendment is required if a plan sponsor chooses 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. The amendment must specify the date as of which, and the purposes for which, the rules are applied in this manner.
(3) An amendment is not required, if a plan’s terms are not inconsistent with the outcome of Windsor and the guidance in Rev. Rul. 2013-17 and the Notice (for example, the term “spouse,” “legally married spouse” or “spouse under Federal law” is used in the plan without any distinction between a same-sex spouse and an opposite-sex spouse).
(4) The deadline to adopt an amendment required in (1) or (2) above is the latest of: (a) the last day of the tenth month following the close of the plan year in which June 26, 2013 falls or (b) December 31, 2014.
Note: For a multiemployer pension plan, an amendment required in (1) is not subject to the requirements of section 432 of the Code (generally prohibiting an amendment which increases liabilities through changes to benefits, benefit accruals, or vesting schedules for a plan in endangered or critical status), while an amendment required in (2) is subject to those requirements.
PLAN SPONSOR ACTION
A plan sponsor of a multiemployer pension plan (normally the Trustees) needs to review the plan to determine if an amendment is required under the Notice and FAQs. Further, since the plan must comply with the requirements of the Notice and FAQs in operation, the plan sponsor needs to review the plan procedures, summary plan descriptions, election forms and notices, and other participant communications to see if revisions to them are needed. New communications may be required in any event if any options change or new beneficiary designations must be made. Finally, the plan sponsor should review whether the plan has complied with the Windsor outcome on and after June 26, 2013 (except as otherwise allowed by the Transition Rule) (e.g., whether QJSAs and QPSAs were properly made available).