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Deadline approaching to amend retirement plans to reflect Windsor decision

Earlier this year, IRS released guidance on the application of the Supreme Court’sWindsor decision striking down section 3 of the Defense of Marriage Act (DOMA), and IRS’s follow-up rulings issued on that decision, to qualified retirement plans. A ruling issued shortly after the Court’s decision required qualified plans totreata same-sex spouse as a spouse for plan purposes as of Sept. 16, 2013, but didn’t actually require plans to amend their terms to be consistent with the decision.However, in April of this year, IRS made clear that amendments were required by year-end—which is rapidly approaching—if a plan defined marriage by reference to section 3 of DOMA or in a manner otherwise inconsistent withWindsor.

Background on qualified retirement plan rules relating to married participants. Several Code sections provide special rules with respect to married participants in qualified retirement plans, including the following.

…Code Sec. 401(a)(11), under which certain qualified retirement plans must provide a qualified joint and survivor annuity (QJSA) upon retirement to married participants (and generally must provide a qualified pre-retirement survivor annuity (QPSA) to the surviving spouse of a married participant who dies before retirement). If a plan is subject to these rules, the QJSA (or QPSA) may be waived by a married participant only with spousal consent pursuant to Code Sec. 417. If such a plan permits loans to participants, Code Sec. 417(a)(4) requires the plan to obtain the consent of the spouse of a married participant before making a loan to the participant.
…Code Sec. 401(a)(11)(B)(iii), under which certain qualified defined contribution retirement plans are exempt from the QJSA and QPSA requirements provided that a married participant’s benefit is payable in full, on the death of the participant, to the participant’s surviving spouse, unless the surviving spouse consents to the designation of a different beneficiary.
…The required minimum distribution (RMD) rules of Code Sec. 401(a)(9) and the rollover rules of Code Sec. 402(c), which provide additional alternatives for surviving spouses that are not available to non-spousal beneficiaries.
…Code Sec. 1563(e)(5), under which a spouse is generally treated as owning shares owned by the other spouse for purposes of determining whether corporations are members of a controlled group under Code Sec. 414(b).
…Code Sec. 318(a)(1), under which a spouse is generally treated as owning shares owned by the other spouse for purposes of determining whether an employee is a key employee under Code Sec. 416(i)(1), including whether an employee is considered a 5% owner.
…Code Sec. 409(n), under which an employee stock ownership plan (ESOP) that acquires certain employer securities generally must prohibit the allocation or accrual of those securities for the benefit of certain individuals, including the spouse of the seller and the spouse of any individual who owns 25% or more of the securities.
…Code Sec. 409(p), under which no portion of the assets of an ESOP attributable to employer securities consisting of S corporation stock may accrue during a nonallocation year for the benefit of any disqualified person or certain family members of the disqualified person (including the spouse) in certain circumstances.
…Code Sec. 401(a)(13)(B), under which the anti-alienation rules do not apply to the creation, assignment, or recognition of an alternate payee’s right to receive all or a portion of the benefits payable to a participant under a plan pursuant to a qualified domestic relations order (QDRO) described in Code Sec. 414(p); and Code Sec. 402(e)(1), under which an alternate payee who is a spouse or former spouse of the participant is treated as the distributee of a distribution under a QDRO.

Background on remedial amendment period for qualified plans. Code Sec. 401(b) provides a period during which a plan may be amended retroactively to comply with the Code’s qualification requirements. The deadline for amending a plan is generally the time prescribed by law for filing the return of the employer for its tax year in which the amendment was adopted or such later time as IRS may designate.

Rev Proc 2007-44, 2007-28 IRB 54, provides rules regarding the timing of amendments made to qualified retirement plans, including that when there are changes to the plan qualification requirements that affect provisions of the written plan document, the adoption of an interim amendment generally is required by the later of the end of the plan year in which the change is first effective or the due date of the employer’s tax return for the tax year that includes the date the change is first effective.

Background on DOMA and the Windsor decision. In ’96, Congress enacted, and President Clinton signed into law, DOMA.Section 3 of DOMA defined marriage for purposes of administering federal law as the “legal union between one man and one woman as husband and wife.”It further defined “spouse” as “a person of the opposite sex who is a husband or wife.”As a result, same-sex spouses weren’t recognized for purposes of the Code with respect to qualified retirement plans.

In U.S. v. Windsor, et al, (Sup Ct 2013) 111 AFTR 2d 2013-2385, the Supreme Court struck down section 3 of DOMA as an unconstitutional deprivation of equal protection.The Court stated that its opinion and holding were confined to “lawful marriages.”For more details on the decision, see Weekly Alert ¶  4  07/03/2013.

Subsequent IRS guidance. Following the Court’s decision, IRS issued guidance explaining the Federal tax implications of the Windsor decision.In Rev Rul 2013-17, IRS stated that same-sex couples who were legally married in jurisdictions that recognize their marriage (i.e., “state of celebration”) will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes same-sex marriage. IRS also stated that, for federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and that the term “marriage” includes one between individuals of the same sex.

Rev Rul 2013-17 provided that its holdings apply prospectively as of Sept. 16, 2013, but that taxpayers may rely on the holdings retroactively “with respect to any employee benefit plan or arrangement or any benefit provided thereunder only for purposes of filing original returns, amended returns, adjusted returns, or claims for credit or refund of an overpayment of tax concerning employment tax and income tax with respect to employer-provided health coverage benefits or fringe benefits that were provided by the employer and are excludable from income” under Code Sec. 106, Code Sec. 117(d), Code Sec. 119, Code Sec. 129 , or Code Sec. 132 based on an individual’s marital status.IRS also indicated that further guidance was forthcoming on the application ofWindsorto other employee benefits and employee benefit plans and arrangements.For more details on this guidance, see Weekly Alert ¶  3  09/05/2013.

Earlier this year, in Notice 2014-19, 2014-17 IRB 979, IRS provided guidance, in question-and-answer (Q&A) format, on the effect ofWindsoron qualified retirement plans and plan amendments.Among other things, the Notice stated that a plan must be amended in certain situations, including if its terms with respect to the requirements of Code Sec. 401(a) define a marital relationship by reference to section 3 of DOMA or are otherwise inconsistent with the outcome ofWindsor.The deadline for adopting such amendments is generally Dec. 31, 2014.For more details on the Notice, see Weekly Alert ¶  18  04/10/2014.

Deadline for amendments coming soon.With only about three weeks remaining in 2014, retirement plans that have not already done so should ensure that the terms of their plans are consistent withWindsor.In addition, plans that amended their terms shortly after theWindsordecision was issued should make sure that they comply with any subsequently issued guidance.

References: For remedial amendment periods, see FTC 2d/FIN ¶  K-5146  ; United States Tax Reporter ¶  4014.08  ; TaxDesk ¶  286,037  .