In Notice 2015-86 (the “Notice”), the IRS provides guidance on the application of the decision by the U.S. Supreme Court in Obergefell v. Hodges (“Obergefell”) to qualified retirement plans and to health and welfare plans, including cafeteria plans under section 125 of the Code. This guidance relates solely to the application of federal tax law with respect to same-sex spouses. Here is what the IRS said.
HOLDING IN OBERGEFELL
On June 26, 2015, the Supreme Court held in Obergefell that the Fourteenth Amendment: (1) requires a state’s civil marriage laws to apply to same-sex couples on the same terms and conditions as opposite-sex couples, and (2) prohibits a state from refusing to recognize a lawful same-sex marriage performed in another State on the ground of its same-sex character.
QUALIFIED RETIREMENT PLANS
Required Or Optional Changes. A qualified retirement plan is not required to make additional changes as a result of Obergefell. Q&A-8 of earlier issued Notice 2014-19 required these plans to be amended to reflect United States v. Windsor (“Windsor”) (holding section 3 of DOMA unconstitutional) and the requirements of Notice 2014-19 itself by no later than December 31, 2014. Thus, under Windsor and Notice 2014-19, any plan amendments required to recognize same-sex spouses and their marriages with respect to the section 401(a) qualification requirements are already required to be adopted and effective. However, a plan sponsor may decide to amend its plan following Obergefell to make certain optional changes or clarifications, such as those described below.
New Rights Or Benefits. In response to Windsor, some plan sponsors may have amended their qualified retirement plans to provide new rights or benefits with respect to participants with same-sex spouses in order to make up for benefits or benefit options that had not previously been available to those participants. For example, such an amendment may have provided participants who commenced a single life annuity distribution prior to June 26, 2013 (the date of the Windsor decision) with an opportunity to elect a qualified joint and survivor annuity (a “QJSA”) form of distribution as of a new annuity starting date. Following Obergefell, some plan sponsors might similarly decide to make discretionary plan amendments to provide new rights or benefits with respect to participants with same-sex spouses. Plan sponsors are permitted to make such amendments, so long as the amendments comply with the applicable qualification requirements (such as the nondiscrimination requirements of section 401(a)(4)).
Retroactive Recognition Of Same-Sex Marriage. In general, under Windsor and Notice 2014-19, a qualified retirement plan fails to meet the applicable section 401(a) qualification requirements (such as the qualified joint and survivor requirements of section 401(a)(11)) if it does not recognize the same-sex spouse of a participant as a spouse on and after June 26, 2013, the date of the Windsor decision.
However, a plan will not lose its qualified status if it applies Windsor prior to June 26, 2013. 5 A plan sponsor that has not yet made such a retroactive amendment in accordance with Notice 2014-19 may decide to make such an amendment after this Notice is issued. Such an amendment will not cause the plan to lose its qualified status, provided the amendment otherwise complies with Q&A-3 of Notice 2014-19 (for example, the amendment must comply with applicable qualification requirements, such as section 401(a)(4)).
Section 436(c). In general, under section 436(c), a discretionary amendment to a single-employer defined benefit plan that increases the liabilities of the plan cannot take effect unless the plan’s adjusted funding target attainment percentage is sufficient or the plan sponsor makes the additional contribution specified under section 436(c)(2). Because an amendment that extends rights and benefits to a same-sex spouse in response to Obergefell or this Notice is a discretionary expansion of coverage, the amendment is subject to the requirements of section 436(c).
Amendment Deadlines. Amendments to a qualified retirement plan that are contemplated by this Notice are discretionary amendments. Thus, pursuant to section 5.05(2) of Rev. Proc. 2007-44, the deadline to adopt any such amendment is generally the end of the plan year in which the amendment is operationally effective.
HEALTH AND WELFARE PLANS
Required Changes. Federal tax law generally does not require health and welfare plans to offer any specific rights or benefits to the spouse of a participant. To the extent that a health or welfare plan does offer benefits to the spouse of a participant, the federal tax treatment of the benefits that are provided to a same-sex spouse has already been addressed in earlier issued Rev. Rul. 2013-17 and Notice 2014-1. Accordingly, no changes to the terms of a health or welfare plan are required due to Obergefell.
If a health or welfare plan does offer benefits to the spouse of a participant, however, Obergefell could require changes to the operation of the plan to the extent that the decision results in a change in the group of spouses eligible for coverage under the terms of the plan.
Note: ERISA requires that the terms of a plan be set forth in writing, so ERISA may require a plan amendment to reflect a change in plan operation, even if federal tax law does not.
Changing or Revoking A Cafeteria Plan Election. If, as of the beginning of a plan year, a health or welfare plan that is offered under a section 125 cafeteria plan does not permit coverage of same-sex spouses, and the terms or operation of the health or welfare plan change during the plan year so as to offer such coverage, then cafeteria plan may permit a participant to revoke an existing election and submit a new election, under the circumstances described in the Notice.
Further, the Notice permits a plan sponsor to amend the terms of its cafeteria plan to permit such election changes. This amendment must be adopted by no later than the last day of the plan year including the later of: (1) the date same-sex spouses first became eligible for coverage under the applicable health or welfare plan, or (2) December 9, 2015. Such an amendment may be retroactive to the date same-sex spouses first became eligible for coverage under the plan.