When the Supreme Court held in United States v. Windsor last June that federal law recognizes same-sex marriages, the question arose whether this ruling would apply to tax-qualified retirement plans retroactively. Last week, the IRS answered that question, in part. For tax-qualification purposes, plans must generally recognize the Windsor decision as of the date of the decision (June 26, 2013). Plans could also voluntarily recognize the effect of the decision as of an earlier date. The IRS, however, left open several questions, including how Windsor would apply with respect to a claim by a participant or beneficiary for retroactive benefits. Below are highlights of the recent IRS guidance (consisting of Notice 2014-19 and FAQs).
Under the recent IRS guidance, retirement plans must recognize same sex marriage as of the date Windsor was decided, June 26, 2013, in order to satisfy the tax-qualification rules. These rules require certain plans to provide survivor benefits to spouses absent their consent to the contrary and include several other requirements relating to marriage. The IRS provided the following details:
- Definition of Marriage. The IRS previously stated that same sex marriages will be recognized based on the place where the marriage was celebrated. This approach was effective September 16, 2013. Accordingly, for the period between the date of the Windsor decision (June 26, 2013) and September 16, 2013, the IRS will permit a plan to define marriage based on the participant’s state of domicile. However, the IRS will not permit a plan to define marriage based on a choice of law provision in a plan document that refers to a different state’s law.
- Correcting the Past. If the plan has not been operated to reflect the Windsor decision since June 26, 2013, the IRS states that the IRS correction procedures may be used to remedy a failure to obtain spousal consent.
- Optional Earlier Application. A plan could be amended to recognize same sex marriage prior to June 26, 2013. The amendment could recognize same sex marriage for only certain purposes, such as the availability of the qualified joint and survivor annuity. The IRS cautioned, however, that such an amendment could be “difficult to implement” and “create unintended consequences,” presumably because the plan might already have paid the benefit to a different person or in a different form.
- New Optional Form Elections. A plan could be amended to offer participants with same sex spouses a new opportunity to elect a qualified joint and survivor annuity or other optional forms of benefit.
- Plan Amendments. Depending on the current terms of the plan, a plan may need to be amended to reflect the Windsor decision. These plan amendments must be adopted by December 31, 2014 (or, if later the due date of the employer’s tax return for the tax year that includes the date the change is first effective). Governmental plans may be amended by the end of the first legislative session of the body with authority to amend plans that ends after December 31, 2014. A Windsor amendment is not subject to the prohibition against increasing liabilities by plan amendment for underfunded plans under section 436 of the Internal Revenue Code, except to the extent that the amendment recognizes the effect of Windsor prior to June 26, 2013.
The recent IRS guidance does not address whether a participant or beneficiary could successfully claim benefits retroactively based on Windsor. Although the IRS has interpretive authority over several provisions of the law relating to this question, the IRS limited its guidance to the tax-qualification rules in the Internal Revenue Code. As a result, a claim could be brought by a participant or beneficiary, for example, claiming that benefits were improperly paid prior to the Windsor decision because the plan did not obtain the consent of a same-sex spouse as it would have were the participant married to an opposite-sex spouse.
How this claim would be resolved depends on several factors. For a plan that is sponsored by a private employer, there is no claim for benefits under the U.S. Constitution based on the Windsor case. Instead, a claim for benefits would be brought under Section 502(a)(1)(B) of ERISA, which permits a participant or beneficiary to bring a claim for benefits under the terms of a plan. Accordingly, a court would consider whether the benefits were due under the terms of the plan document. In one case, Cozen O’Connor v. Tobits, a federal district court interpreted a plan to recognize same-sex spouses retroactively. However, in that case, the plan administrator did not offer an interpretation of the plan. A plan administrator’s interpretation of a plan is typically entitled to deference, and, depending on the plan document, a plan administrator might interpret a plan not to incorporate the Windsor decision before it was issued. It remains to be seen whether a court would consider that interpretation to be unreasonable.