Impact on Retirement Plans of Supreme Court Ruling on DOMA
The Supreme Court, in U.S. v. Windsor, ruled on June 26, 2013 that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional. Section 3 of DOMA provided that only persons of the opposite sex could be recognized as “spouses” for purposes of federal law and that a “marriage” could only be between opposite-sex partners. In a recent Alert, we discussed the ruling's impact on employers and employees; now let’s take a look at retirement plans.
Under this ruling, qualified retirement plans (401(k) plans, profit-sharing plans, money purchase plans, defined benefit plans, cash balance plans, and ESOPs) and 403(b) plans must now treat the relationship of same‐sex married couples as a marriage and each party to that marriage as a spouse in order to maintain the plans’ tax‐qualified status (see ‘Open Issues’ below for a discussion of issues in determining who is married). As a result of the Windsor decision, federal laws no longer restrict the terms “spouse” and “marriage” to opposite‐sex relationships. Thus, federal law is now silent as to the parties to a marriage. A critical area of future controversy will involve employees who were married to same‐sex partners in states that permitted such marriages, but who now reside in states where such marriages are not recognized.
Specific Areas Impacted by the Ruling
Qualified Joint and Survivor Annuities (QJSAs). Married participants in defined benefit plans, cash balance plans, and some defined contributions plans must receive their benefits paid from the plan in the form of a QJSA under which the participant receives periodic annuity payments while living and the surviving spouse receives a percentage of those payments after the employee’s death, unless the spouse has affirmatively waived their right to the QJSA. As a result of the ruling, federally recognized same-sex spouses will be protected by the QJSA requirement and an employee will have to obtain his or her same-sex spouse’s consent in order to be able to elect an alternate form of benefit.
Qualified Pre-Retirement Survivor Annuities (QPSAs). If a plan participant dies prior to retirement, defined benefit plans, cash balance plans, and some defined contribution plans are required to provide a survivor annuity to a participant’s spouse unless that form of death benefit has been waived by the spouse. These plans (even those not subject to the QPSA requirement) require spousal consent to name a non-spousal beneficiary, if that beneficiary is to receive 50% or more of the benefit. A same‐sex spouse will now be automatically entitled to a death benefit upon the employee’s death unless they waive their right to the benefit.
Eligible Rollover Distributions. Only a spouse of a deceased participant is permitted to rollover the participant’s benefits to the spouse’s own IRA or to another qualified plan. A non-spouse beneficiary can only rollover a participant’s benefits to an inherited IRA. A same-sex spouse will now be able to elect to take a plan distribution and roll it over to his or her own IRA or to another qualified plan (including the right to make it an in‐plan Roth conversion).
Hardship Distributions. Most defined contribution plans permit hardship distributions in order to pay for their own, a spouse’s, or a dependent’s medical, tuition, or funeral expenses. Before the DOMA decision, if the reason for a hardship distribution was to pay for a same-sex spouse’s expenses, the distribution was only available if the participant specifically designated that same-sex spouse as the participant’s designated beneficiary. Now, hardship distributions should be able to be taken because of expenses related to a federally-recognized same-sex spouse in the same way that they can be taken for expenses related to an opposite-sex spouse.
Qualified Domestic Relations Orders (QDROs). A QDRO enables divorcing spouses to require a qualified retirement plan to “split” a participant’s benefits as provided under a domestic relations order. A divorcing same‐sex spouse will now be entitled to a portion of the participant’s plan benefits as part of the divorce process by submitting a qualified domestic relations order to the plan sponsor.
Minimum Required Distributions. Before the DOMA decision, benefit payments to a same-sex spouse as a beneficiary were required to commence within one year following the participant’s death or be paid in full within five years after the participant’s death. The same-sex spouse of a participant who dies prior to receiving benefits will be able to postpone taking distributions until the participant would have reached age 70‐1/2; these benefit payments should no longer be subject to the incidental death benefit rules requiring a faster distribution of benefits in the case of a difference of more than 10 years of age between the participant and the beneficiary.
Other ERISA Provisions. The spousal status is also important in a number of other areas of ERISA, such as (1) eligibility for the one participant plan exception, (2) ERISA disclosures to spouses, (3) party‐in-interest/disqualified person status, (4) right to bring benefit claims, (5) family attribution rules, and (5) prohibited transaction class exemptions.
There are a couple of issues left open by the ruling that will require guidance from the Internal Revenue Service (IRS) and the Department of Labor (DOL). We hope that the guidance will be issued quickly to minimize the headaches for employers.
Recognition of same-sex marriages. Section 2 of DOMA, which was not at issue before the Supreme Court, allows states to refuse to recognize the validity of same‐sex marriages that were legally performed in other states. As a result, it is not clear whether, for purposes of the application of federal law, a same‐sex married couple will always be considered married regardless of residence or domicile, despite how they are treated under applicable state law. Employers will have to wait for guidance with respect to issues that arise where individual spouses live in different states with different laws on same‐sex marriage, and with respect to employers with employees in more than one state. Tracking an individual and his or her changing state‐determined marital status poses real challenges for employers. In the mean time, it is critical for employers to recognize that these issues exist and to move forward with caution. Plan administration will depend on whether the IRS and DOL can provide any relief for determining which same‐sex spouses are subject to the spousal protections and the appropriate process and timing to gather the same‐sex marriage information. It is possible that the application of this ruling will be limited to only same‐sex spouses that reside in a state that recognizes the marriage license. However, it is also possible that IRS/DOL guidance or subsequent court decisions may hold otherwise. The administrative complexities and costs of dealing with differing state laws will be significant.
Effective Date. Since the DOMA provision was ruled unconstitutional and there is technically no statute of limitations within a qualified plan to comply with the Internal Revenue Code, the issue is whether the ruling will be effective June 26, 2013, or an earlier date. The IRS has the authority to provide transition relief and to limit the impact for plan qualification purposes to a prospective date, which is the type of guidance we would anticipate.
Steps Employers Can Take Now
Prior to the issuance of guidance from IRS and DOL, plan sponsors should consider taking the following initial steps:
- Obtain same‐sex marriage information from participants/beneficiaries. Start to develop a process to gather same‐sex marriage information, if one does not currently exist.
- Review the plan document and summary plan description. Many qualified plans were required to include DOMA language in the plan as part of an IRS determination letter process. This language will need to be eliminated, and the remainder of the plan should be reviewed for the term “spouse” and “domestic partner” to see if any of the provisions need to be modified to comply with post‐DOMA rules.
- All nonqualified plans should also be reviewed for compliance with post‐DOMA rules.
The ruling on DOMA will clearly have a significant impact on retirement plans. Employers should anticipate communications from their plan’s advisors and that they will need to make changes to their plan documents and administrative procedures. Depending on the guidance from IRS and DOL, employers operating in multiple states may need to develop extensive procedures to monitor the treatment of participants in same-sex marriages based on their state of residence, which will be challenging for employers and could lead some employees/participants to (if possible) work from states that recognize same-sex marriages.