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This summer, IRS released Revenue Ruling 2013-17, providing guidance on the treatment of same-sex marriages under the Tax Code after the Supreme Court’s decision in United States v. Windsor. Windsor held that section 3 of the Defense of Marriage Act (DOMA) (which defined ‘marriage’ as “a legal union between one man and one woman as husband and wife”) was unconstitutional. The decision has a significant effect on retirement plan administration – married participants and their spouses get special tax treatment for certain purposes, and spouses have rights under ERISA and the Tax Code that non-spouses do not.
Rev. Rul. 2013-17 provides preliminary guidance on how plans should treat same-sex marriages post-Windsor.
In this article we begin with a brief discussion of the significance of marital status in retirement plans and then review and analyze IRS’s guidance.
There are a number of provisions of ERISA and the Tax Code that have ‘special rules’ for the treatment of spouses in retirement plans, including:
Qualified joint and survivor annuity (QJSA), qualified pre-retirement survivor annuity (QPSA) and loan rules that require notarized spousal consent for a waiver.
An exception to the QJSA, QPSA and loan rules for profit sharing (including 401(k)) plans that do not provide life annuities, provided the participant’s benefit is paid in full to the surviving spouse, or the spouse provides a notarized consent to an alternate beneficiary.
‘Special’ rollover rights for spouses.
Exceptions to the hardship withdrawal rules and 10% distribution penalty that take into account a spouse for certain purposes.
An exception to Tax Code section 415 benefit limitation rules: the spouse’s portion of a QJSA is not taken into account.
Post-Windsor, the administration of these rules, and, generally, any other rule of a plan that is affected by a participant’s marital status, will change: persons that, under DOMA pre-Windsor, were not spouses, will now be considered spouses.
Rev. Rul. 2013-17 is the first in a series of rulings intended to describe how this will work.
Rev. Rul. 2013-17 provides a clear and (relatively) easy to administer new standard under the Tax Code for determining the marital status of a participant and his or her same-sex partner: if their marriage was validly celebrated in the state where it was entered into, they are married. Thus, IRS is adopting a ‘state of celebration’ rule, rather than a ‘state of domicile’ rule, effectively recognizing same-sex marriages, even where the taxpayer resides in a state that doesn’t recognize same-sex marriages (or prohibits their recognition). For this purpose, state “means any domestic or foreign jurisdiction having the legal authority to sanction marriages.” Thus, e.g., same-sex marriages validly celebrated in Canada are recognized.
The ruling applies prospectively, as of September 16, 2013. Taxpayers (e.g., distributees) may, however, file amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax. IRS said that it intends to offer further guidance with respect to the retroactive application of Windsor to retirement plans. In that regard, it said:
Such guidance will take into account the potential consequences of retroactive application to all taxpayers involved, including the plan sponsor, the plan or arrangement, employers, affected employees and beneficiaries. The Service anticipates that the future guidance will provide sufficient time for plan amendments and any necessary corrections so that the plan and benefits will retain favorable tax treatment for which they otherwise qualify.
The rule adopted by IRS makes administration going forward (relatively) straightforward. Generally, if on or after September 16, 2013 a participant validly celebrates a same-sex marriage somewhere, it’s valid for purposes of the plan, or at least for those purposes of the plan over which the IRS has jurisdiction. QPSA/QJSA rules, rollover rights, etc., all will be applied treating the participant as married to his or her same-sex spouse.
That’s the simple fact situation. Where the marriage happens after September 16, 2013, it will generally be clear what plan administrators have to do: treat the same-sex marriage the way they would treat an opposite-sex marriage. Questions remain, however, about how to handle pre-September 16, 2013 marriages.
Below are some key issues that, as we understand it, remain open. We are going to concentrate on two areas: (1) QPSA and QJSAs, beneficiary designations and spousal waivers; and (2) QDROs. Many of the key questions about the application of new same-sex marriage rules will come up in one or both of these contexts. Consider:
1. A 401(k) plan provides that if a participant dies before his or her account is distributed, the entire account must be paid to his or her spouse unless the participant has designated a different beneficiary; if the participant is married and designates a different beneficiary, then that designation must have his or her spouse’s notarized consent. (This is a typical 401(k) preretirement death benefit.) A participant in this plan is married to a same-sex partner as of September 16, 2013. The participant has on file a designation of her brother as her beneficiary, and her same-sex spouse has not consented to that designation (indeed, there was no procedure for the same-sex spouse to consent). Is that designation void as of September 16, 2013? It appears that, based on Rev. Rul. 2013-17, the answer to that question should be yes, because a beneficiary designation that does not have a spouse’s consent is not valid under Tax Code rules. But, is this arguably an issue of retroactivity as to which IRS is going to provide subsequent guidance?
2. Plan’s are allowed to apply a rule, for purposes of the QPSA/QJSA rules, that a participant is not treated as married “unless the participant and such spouse had been married throughout the 1-year period ending on the earlier of the participant’s annuity starting date or the date of the participant’s death.” This appears to be an issue of retroactivity, although one assumes that IRS will require (or allow) the ‘crediting’ of pre- September 16, 2013 periods towards this requirement. We note that this rule also applies to QDROs, the interpretation of which is in DOL’s jurisdiction.
3. What should be done in defined benefit plans where payment has already been made or has already begun in a non-QJSA form? One set of issues is presented where the entire benefit has already been paid out (e.g., there’s been a lump sum distribution). In that case, will plans be required to somehow make efforts to ‘get back’ the benefit paid or (conceivably) get the spouse’s consent? Another set of issues is presented where payment has commenced in, e.g., a single life form. In that case, will the payment form have to be recalculated as a QJSA if the spouse does not consent?
4. With respect to QDROs, where there has been a pre-September 16, 2013 same-sex divorce, will there be any opportunity to re-qualify the divorce decree (or, e.g., judicially approved property settlement) as a QDRO? It’s also conceivable that a same-sex marriage was entered into on the assumption (reflected in any prenuptial agreement) that the marriage would not (because of (now-void) section 3 of DOMA) upset a previous beneficiary designation (as in our example in 1. above, of a brother). But if pre-September 16, 2013 non-spouse beneficiary designations are voided on that date by a pre-existing same-sex marriage, the parties intentions will be frustrated. All of this has to be sorted out, presumably by DOL, in consultation with IRS and Treasury.
We identify the foregoing issues because they are likely to be among the most problematic. Hopefully, they will also be atypical.
The rules discussed above – the QJSA, QPSA and QDRO rules – are not just Tax Code requirements. Parallel provisions exist under ERISA. And these rules create substantive rights. Those rights may be independently enforceable, in a court, by the participant or his or her spouse or ex-spouse. In such an action, the court may or may not defer to whatever approach IRS (or DOL) has taken in Rev. Rul. 2013-17 or other guidance.
Thus, while sponsors may be able to ‘rely’ on Rev. Rul. 2013-17 vis-a-vis the IRS, a private action may produce a different result.
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Determining rules for the retroactive application of the recognition of same-sex marriages is particularly problematic because the new rule, as articulated in Rev. Rul. 2013-17, is not just ‘new’ – it is the exact opposite of the old rule, on which some people may have based their plans. And in the fact situations/issues discussed above, there will other parties, besides the same-sex spouse: an alternate beneficiary or (conceivably) the plan itself.
In these cases, until there is clear guidance (at least), where there is a disputed claim to plan benefits, the plan fiduciary may want to consider an interpleader action. (See our article Court rules on same-sex spouse’s rights under DC plan.)
There will be other issues, e.g., the tax treatment of distributions before or after September 16, 2013, that may be complicated but will be generally resolvable based on the guidance in the revenue ruling. There will be further guidance from IRS (particularly on the issue of retroactivity) and from DOL, and there will be further litigation.
We will continue to follow this issue.