Effect of Supreme Court’s marriage equality ruling on employee benefit plans
Effect of Supreme Court’s marriage equality ruling on employee benefit plans
Notice 2015-86, 2015-52 IRB
In a Notice, IRS has provided guidance on the application of the Supreme Court’s landmark marriage equality decision, Obergefell v. Hodges, to qualified retirement plans under Code Sec. 401(a) and to health and welfare plans, including cafeteria plans under Code Sec. 125.
Background. Section 3 of the Defense of Marriage Act (DOMA) defined marriage for purposes of administering Federal law as the “legal union between one man and one woman as husband and wife,” and further defined the term “spouse” as “a person of the opposite sex who is a husband or wife.” As a result, same-sex spouses who were married under applicable state law were not recognized as spouses for purposes of the federal tax rules that apply because an individual is married, including the rules that apply with respect to employee benefit plans.
In 2013, in a 5-4 opinion, the Supreme Court, in U.S. v. Windsor, (Sup Ct 6/26/2013) 111 AFTR 2d 2013-2385111 AFTR 2d 2013-2385 (see Weekly Alert ¶ 4 07/03/2013), struck down section 3 of DOMA as an unconstitutional deprivation of equal protection.
Following Windsor , IRS issued Rev Rul 2013-17, 2013-38 IRB 201 (see Weekly Alert ¶ 3 09/05/2013), which provided that a same-sex couple that was legally married in a domestic or foreign jurisdiction that recognized their marriage would be treated as married for federal tax purposes, regardless of where they currently live. Further, it provided that lawfully married same-sex couples must file as married couples for federal income tax purposes.
In addition to Rev Rul 2013-17, following the Windsor decision, IRS issued Notice 2014-19, 2014-47 IRB 979, amplified by Notice 2014-37, 2014-24 IRB 1100 (on the application of the Windsor decision to qualified retirement plans and option to apply the decision retroactively); Notice 2014-1, 2014-02 IRB 270 (on elections and reimbursements for same-sex spouses under cafeteria plans, flexible spending arrangements, and health savings accounts); Notice 2013-61, 2013-44 IRB 432 (on the application of the Windsor decision and Rev Rul 2013-17 to employment taxes and special administrative procedures for employers to make adjustments or claims for refund or credit); and Rev Proc 2014-18, 2014-7 IRB 513 (on extensions of time for estates to make a portability election) (collectively, post- Windsorguidance).
In 2015, in a 5-4 decision, the Supreme Court in Obergefell v. Hodges, (Sup Ct 06/26/2015) 115 AFTR 2d 2015-2309115 AFTR 2d 2015-2309 (see Weekly Alert ¶ 28 07/02/2015), struck down four state-wide bans on same-sex marriage, holding that the Fourteenth Amendment requires all States to license a marriage between two people of the same sex. And, since same-sex couples could now exercise the fundamental right to marry in all States, there was no lawful basis for a State to refuse to recognize a lawful same-sex marriage performed in another State.
IRS has now amplified Notice 2014-19, in light of the Obergefell decision, as follows.
Effect of Obergefell decision on employee benefit plans. In Notice 2015-86, IRS stated that it doesn’t expect Obergefell to have a significant impact on the application of federal tax law to employee benefit plans, noting that while that decision requires states to recognize same-sex marriages performed in other states, these marriages have already been recognized for federal tax law purposes under Windsor and IRS’s post- Windsor guidance. However, IRS stated that some plan sponsors may alter aspects of their employee benefit plans, or how their plans are administered, in response to Obergefell. In addition, some plan sponsors have asked for clarification of the application of Obergefell to certain changes to employee benefit plans, such as a discretionary expansion of benefits that is not required under the federal tax rules. IRS addressed these and other issues in question and answer (Q&A) format, as outlined below.
With respect to qualified retirement plans, Notice 2015-86 provides that:
- …A qualified retirement plan is not required to make additional changes as a result of Obergefell. A number of amendments were previously required underWindsor and IRS’s post- Windsor guidance, but these changes should already be adopted and effective (subject to a possible delayed amendment deadline for governmental plans). A plan sponsor may, however, decide to amend its plan following Obergefell to make certain optional changes or clarifications. (Q&A 1) Possible changes may include new rights or benefits with respect to participants with same-sex spouses, so long as the amendments comply with the applicable qualification requirements. IRS cited as an example providing participants who commenced a single life annuity distribution prior to June 26, 2013 (i.e., the date of the Windsor decision) with an opportunity to elect a qualified joint and survivor annuity (QJSA) form of distribution as of a new annuity starting date. (Q&A 2) A plan can also still make an amendment, as provided in Notice 2014-19, to apply Windsor retroactively and recognize the same-sex spouse of a participant as a spouse prior to June 26, 2013. (Q&A 3)
- …A discretionary amendment to a single-employer defined benefit plan in response to Obergefell or Notice 2015-86, such as to extend certain rights and benefits to a same-sex spouse, is subject to the requirements of Code Sec. 436(c), which provides that a discretionary amendment that increases the liabilities of the plan cannot take effect unless the plan’s adjusted funding target attainment percentage is sufficient or the plan sponsor makes the additional contribution specified under Code Sec. 436(c)(2). (Q&A 4)
- …The type of plan amendments contemplated by Notice 2015-86 are discretionary amendments under Rev Proc 2007-44Sec. 5.05; therefore, the deadline for adopting those amendments is generally the end of the plan year in which the amendment is operationally effective. However, per Rev Proc 2007-44, Sec. 5.06(1), in the case of a governmental plan, the deadline for such amendment is the later of (i) the end of the plan year in which the amendment is operationally effective, or (ii) the last day of the next regular legislative session beginning after the amendment is operationally effective in which the governing body with authority to amend the plan can consider a plan amendment under the laws and procedures applicable to the governing body’s deliberations.
With respect to health and welfare plans, Notice 2015-86 provides that:
- …For federal tax law purposes, no changes to the terms of a health or welfare plan are required due to Obergefell. Federal tax law generally does not require health and welfare plans to offer any specific rights or benefits to the spouse of a participant, and the federal tax treatment of any such benefits has already been addressed in prior guidance. If a health or welfare plan does offer benefits to the spouse of a participant, however, Obergefell could require changes to the operation of the plan to the extent that the decision results in a change in the group of spouses eligible for coverage under the terms of the plan. For example, if the terms of a health or welfare plan provide that coverage is offered to the spouse of a participant as defined under applicable state law, and the plan administrator determines that applicable state law has expanded to include same-sex spouses as a result of Obergefell, then the terms of the plan would require coverage of same-sex spouses as of the date of the change in applicable state law. (Q&A 6)
- …If a health or welfare plan that is offered under a Code Sec. 125 cafeteria plan does not permit coverage of same-sex spouses as of the beginning of a plan year, but the terms or operation of the plan change during the plan year to permit coverage of same-sex spouses, the cafeteria plan may permit a participant to revoke an existing election and submit a new election if the terms of the cafeteria plan allow (or are amended to allow, as explained below) a participant to make a change in coverage due to a “significant improvement” in coverage during the coverage period under an existing coverage option. (Reg. § 1.125-4(f)(3)(iii)) Such a change in eligibility could result from, among other things, an amendment to the terms of the plan, a change in applicable state law, or a change in the interpretation of the existing terms of the plan. This new election may be an election by a participant to add coverage for a same-sex spouse to a benefit option in which the participant is already enrolled, or an election by a participant who had not previously elected coverage to add coverage for the participant and a same-sex spouse. (Q&A 7)
- …If the terms of a cafeteria plan do not allow participants to make a change in election due to a significant improvement in coverage during the coverage period under an existing coverage option, the plan sponsor may amend the terms of the cafeteria plan at any time to allow such an election. In the case of a change described above, such an amendment must be adopted no later than the last day of the plan year that includes the later of (i) the date same-sex spouses first became eligible for coverage under the plan, or (ii) Dec. 9, 2015. Such an amendment may be retroactive to the date same-sex spouses first became eligible for coverage under the plan. (Q&A 8)
References: For when a taxpayer is married for tax purposes, see FTC 2d/FIN ¶ A-1601; United States Tax Reporter ¶ 77,034.01; TaxDesk ¶ 566,501; TG ¶ 1914.