IRS Adopts Uniform Policy Regarding Same-Sex Spouses – Impact on Retirement Plans

The Internal Revenue Service (IRS) issued Revenue Ruling 2013-17 on August 29, 2013 in response to the Supreme Court decision striking down section 3 of the Defense of Marriage Act (DOMA).  The ruling establishes a uniform policy for the recognition of same-sex spouses for federal tax purposes, which includes qualified retirement plans.

Under the ruling, same-sex couples are lawfully married for federal tax purposes when the couple was married in a state or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the couple currently or subsequently resides in a state or foreign jurisdiction that does not recognize the validity of same-sex marriages.

IMPACT ON QUALIFIED RETIREMENT PLANS

Effective September 16, 2013, qualified retirement plans must comply with the following rules under Revenue Ruling 2013-17 (the IRS has indicated it will issue additional guidance for periods prior to September 16):

1. A qualified plan must treat a same-sex spouse as a spouse for all purposes of satisfying federal tax law relating to qualified retirement plans if a same-sex marriage was validly entered into in a jurisdiction whose laws authorize the marriage even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.
2. A person who is in a registered domestic partnership or civil union is not considered to be a spouse for purposes of applying the federal tax law requirements relating to qualified retirement plans, regardless of whether that person’s partner is of the same or opposite sex.

Plan Sponsor Action Item

Employers sponsoring qualified retirement plans will need to verify as soon as possible that same-sex (and opposite sex) couples have been legally married as opposed to being in registered domestic partnerships or civil unions. We anticipate that guidance will be forthcoming, hopefully, from IRS or, alternatively, labor or ERISA lawyers regarding how employers can collect this information without violating any state or local nondiscrimination laws.

Examples

The following examples of the application of this policy were provided by the IRS:

1. Plan A, a qualified defined benefit plan, is maintained by Employer X, which operates only in a state that does not recognize same-sex marriages.  Nonetheless, Plan A must treat a participant who is legally married to a spouse of the same sex under the laws of a different jurisdiction as married for purposes of applying the qualification requirements related to spouses.
2. Plan B is a qualified defined contribution plan (401(k), profit sharing, 403(b), etc.) and provides that the participant’s account must be paid to the participant’s spouse upon the participant’s death unless the spouse consents to a different beneficiary.  Plan B does not provide for annuity forms of distribution.  Plan B must pay this death benefit to the same-sex surviving spouse of any deceased participant.  Plan B is not required to provide this death benefit to a deceased participant’s surviving registered domestic partner.  However, Plan B is allowed to make a participant’s registered domestic partner the default beneficiary who will receive the death benefit unless the participant chooses a different beneficiary. [Note: the consent of the domestic registered partner is not required in this case in order for the participant to choose a different beneficiary.]

IMPACT ON OTHER RETIREMENT ARRANGEMENTS

Revenue Ruling 2013-17 does not explicitly state that these rules also apply to nonqualified retirement plans (plans primarily for a select group of management or highly compensated employees), Simplified Employee Pensions (SEPS), SIMPLE IRAs, etc.  However, in Q&A 19 of the frequently asked questions provided by IRS along with the ruling, the IRS indicated that it “intends to issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Revenue Ruling 2013-17.”  We expect that these rules may be applied to all these types of plans given that they are tax-favored to the participants, the employer, or both.

FUTURE IRS GUIDANCE

The IRS indicated that future guidance on this policy related to qualified retirement plans will address the following, among other issues:

1. Plan amendment requirements including the timing of any amendments required to comply with these changes.
2. Any necessary corrections that need to be made by plan sponsors related to plan operations prior to the time future guidance is issued.

CONCLUSION

From a plan operations standpoint, the adoption of a uniform policy by IRS for the recognition of same-sex marriages is the best policy that could have been adopted.  Otherwise, plan sponsors operating in multiple jurisdictions with different laws regarding the recognition of same-sex marriages would be in the impossible position of applying state or foreign jurisdiction laws to same-sex couples based on their residence rather than their status as a legally married couple.

We will keep our clients and friends updated as additional guidance is issued with respect to retirement plans.  For additional updates regarding the impact of this policy on same-sex couples’ income tax reporting related to other benefits, please visit our LGBT Individual and Alternative Family Services page and see the Alerts listed.