9/24/2013
Introduction
On August 29, 2013, the Department of Treasury (Treasury) and the Internal Revenue Service (IRS) published Revenue Ruling 2013-17 , setting forth a ceremonial definition of marriage inclusive of same-sex couples for federal tax purposes. This Ruling is in direct response to questions left unanswered by the Supreme Court’s decision in United States v. Windsor, 133 S. Ct. 2675 (2013) when the Court struck down Section 3 of Defense of Marriage Act (DOMA). Importantly, the IRS ruling has no impact on the federal tax treatment of civil unions, domestic partnerships, or common law marriages nor does it impact the state tax treatment of any same-sex relationships.
On September 18, 2013, the Employee Benefits Security Administration (EBSA) under the Department of Labor (DOL), also published guidance following Windsor, with Technical Release No. 2013-04. The DOL also adopts the IRS definition of marriage to include same-sex couples for the purposes of the Employee Retirement Income Security Act of 1974 (ERISA). The DOL's guidance also states that the DOL coordinated their response with the Treasury/IRS and the Department of Health and Human Services (HHS) to ensure a consistent definition for ERISA and the Health Insurance Portability and Accountably ACT (HIPAA) as required by Congress.
This article will address operational issues that generally affect retirement and welfare plans. While at this time, no amendments are required to any ftwilliam.com documents (welfare and/or pension) as a result of the Windsor decision and the Rulings by IRS and DOL, this article will discuss how plan documents should now be interpreted to include same-sex marriages and be in compliance with the IRS Rev. Ruling 2013-17 which went prospectively into effect September 16, 2013. Additionally, this article will discuss the background of the IRS Ruling, including DOMA and Windsor, and how marriage is now defined within the context of qualified retirement and welfare plans. While there is no guidance at this time from the IRS relating to how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Revenue Ruling 2013-17 prior to September 16, 2013, general guidelines are suggested.Background
The Defense of Marriage Act (DOMA)
DOMA was first enacted by Congress on September 21, 1996 and excluded same-sex couples from the definition of marriage and the corresponding benefits, rights, and privileges contingent on marital status. On a federal level, DOMA effectively barred same-sex married couples from being recognized as "spouses" for purposes of over 1,000 federal laws, or receiving federal marriage benefits.The two most relevant sections of DOMA to the issues of benefits are Section 2 and Section 3. Section 2 of DOMA, provides states the authority to refuse to recognize same-sex marriages granted under the laws of other states.
No State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship. 28 USC § 1738C.
Section 3 of DOMA, which is later repealed in Windsor and discussed below, states that:
In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife. 1 U.S.C. §7.
United States v. Windsor
Issued on June 26, 2013, the Supreme Court ruled in United States v. Windsor, 570 U.S. _, 133 S. Ct. 2675 (2013) that Section 3 of DOMA is unconstitutional because it violates the principles of equal protection and is unconstitutional as a deprivation of the equal liberty of persons protected by the Fifth Amendment. The case centered around a same-sex couple Edith Windsor and Thea Spyer who married in Ontario, Canada, in 2007 where their marriage was legal. The two New York residents had been together for 40 years. In 2009, Spyer died. While New York recognized the two women's union, the federal government under DOMA, did not. Windsor was thus required to pay more than $363,000 in federal estate taxes on her wife's estate, a payment not required by couples whose marriages are legally recognized by the federal government . In Windsor, the Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA) defining "marriage" as exclusively the union between a man and a woman and "spouse" as a person who is married to someone of the opposite sex. The Court ruled that “DOMA seeks to injure the very class New York seeks to protect. By doing so it violates basic due process and equal protection principles applicable to the Federal Government,” Windsor, 133 S. Ct at 2694-95. The Supreme Court in Windsor left the door open regarding Section 2 of DOMA, which it did not address. It still is unclear whether this same holding could be applied in states, unlike New York, which do not recognize same sex marriages or have passed a state law specifically defining marriage between persons of the opposite sex.IRS Revenue Ruling 2013-17
On August 29, 2013, the IRS issued Revenue Ruling 2013-17 and set for guidance on the effect of Windsor on federal tax law and how marriage should be defined for federal tax purposes. Under the Ruling, the IRS will recognize a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex couples. The IRS concluded that the terms, “husband and wife,” include an individual married in a state whose laws authorize the marriage of two individuals of the same sex, and the term “marriage” includes such marriages of individuals of the same sex. For federal tax purposes, the marriage will be recognized even if the couple resides in a jurisdiction that does not recognize the validity of the marriage. The approach is commonly referred to as the ceremony rule. For example, a same-sex couple who married in Maryland (which recognizes same-sex marriage) but now resides in Virginia (which does not recognize same-sex marriage) will be considered married for federal tax purposes. As of September 2013,thirteen states (California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington), the District of Columbia, several counties in New Mexico, and five Native American tribes have legalized the issuing of same-sex marriage licenses. It is important to note that the Ruling also held that “marriage” for federal tax purposes does not include registered domestic partnerships, civil unions or other relationships formally recognized under state law that are not defined as marriage under that state’s law. Thus, state tax laws are not affected by Windsor or the IRS Ruling. When does the IRS Ruling Take Effect? Qualified retirement and health plans must comply with these rules prospectively as of September 16, 2013. The IRS has not yet provided guidance on the application of Windsor with respect to qualified retirement plans before September 16, 2013 or if a same-sex spouse has any causes of action under ERISA for events occurring before September 16, 2013. The IRS 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. It is expected that future guidance will address plan amendment requirements (including the timing of any required amendments), and any necessary corrections relating to plan operations for periods before future guidance is issued.Retroactive Action Prior to September 16, 2013
The ruling allows taxpayers to retroactively file amended returns. Corresponding refunds are available to employers for social security and Medicare taxes paid on the imputed income for open years, typically three years from the date the return was filed or two years from the date the tax was paid (typically 2010, 2011, 2012). The requirements for filing a claim for refund or for making an adjustment for an overpayment of the employer and employee portions of social security and Medicare taxes can be found in the Instructions for Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.Department of Labor, Employee Benefits Secuirty Administration (EBSA) Technical Release No. 2013-04
The DOL have also recognized a ceremonial definition of marriage in light of the Windsor and IRS decisions under Release No. 2013-04. “Marriage” includes a same-sex marriage that is legally recognized as a marriage under any state law. Again, this definition does not include domestic partnerships or civil unions regardless of the sex of the couple. The DOL reasoned that benefits based upon state of domicile would create “substantial financial and administrative burdens” resulting in “errors, confusion, inconsistency for employers, individual employees, and the government.” Relying upon the recognition of “spouses” and “marriage based upon the validity of the marriage in the state of celebration, rather than based on the couple’s domicile,” promotes uniformity in administration of employee benefit plans.” Furthermore, HHS will also incorporate this definition of marriage to ensure consistent administration under ERISA and HIPAA.
What does this mean for Qualified Retirement Plans?
Some examples of the impact of DOMA, and the IRS Ruling on Qualified Retirement Plans that went into effect on September 16, 2013 are listed below:- Death Benefits: 401(k) plans generally specify that a death benefit is payable to the surviving spouse unless that spouse consents to an alternate beneficiary. A same-sex spouse will be entitled to the same benefit. Per the IRS ruling, death benefits will be payable to a same-sex spouse regardless of whether the spouse resides in a state where the marriage is not legally recognized. This does not apply to domestic partnerships or civil unions.
- Qualified Joint and Survivor Annuity (QJSA) and Qualified Pre-Retirement Survivor Annuity (QPSA): Currently, defined benefit plans (and defined contribution plans that offer survivor annuity options) must provide automatic survivor benefits to a spouse via QJSA (benefits paid after retirement) and a QPSA (benefits paid if the participant dies before retiring), unless the participant elects otherwise with the consent of his or her spouse. This legal order now extends to individuals in same-sex marriages.
- Spousal Consent: The naming of a non-spouse beneficiary is not permitted unless the spouse waives this right to at least a percentage of the benefit. In addition, plans that provide for a QJSA require spousal consent prior to the participant receiving a loan from the plan. In both instances, this now includes same-sex spouses.
- Qualified Domestic Relations Orders (QDROs): A QDRO is a legal order issued when there is a divorce or separation that splits plan ownership between two spouses or the participant and a child. A same-sex spouse may receive a portion of the participant-spouse's accrued benefit or plan account under a QDRO pursuant to the dissolution of the same-sex marriage.
- Hardship Distributions: Same-sex spouses and dependent children can now be considered the primary beneficiary for hardship distributions such as tuition, medical expenses or funeral expenses.
- Required Minimum Distributions (RMDs): Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. Favorable tax treatment to surviving spouses, including different distributions tables, timing, roll overs to IRA are granted to same sex spouses.
- Attribution Rules: In qualified plans, attribution of stock ownership between spouses is used for a multitude of purposes such as determining highly compensated employees. Stock will now be attributed between same sex spouses.
What does this mean for Health and Welfare Plans?
Welfare and fringe benefits often have provisions that depend on marital status as well, including: cafeteria plans, Health Reimbursement Arrangements (HRAs), Flexible Spending Arrangements (FSAs), COBRA, health insurance portability and special enrollment rights under the Health Insurance Portability and Accountability Act (HIPAA), exclusions from income for dependent care benefits. The IRS also released helpful FAQs regarding the impact of the Ruling on same-sex couples and specific tax refunds available. Some examples of the impact of DOMA, and the IRS Ruling on Welfare Plans that will go into effect on September 16, 2013:- Pre-tax payment of Premiums (cafeteria plans): As of September 16, 2013, employers must stop imputing income for health benefits for same-sex spouses. Employees in a same-sex marriage should be permitted to pay for the coverage on a pre-tax salary reduction basis. Employers may want to send out notices to employees, especially during annual enrollment, to determine if any of them are in a same-sex marriage and wish to correct their plans to utilize the pre-tax benefits they now qualify for. Employers should follow the same guidelines used to determine the marital status of same-sex couples.
- Health Flexible Spending Arrangements/Reimbursement Accounts (FSAs under cafeteria plans and/or HRAs): Claims for reimbursement of medical care expenses for a same-sex spouse may be permitted under health flexible spending account plans. Employers should treat expenses incurred in 2013 by these individuals as eligible for reimbursement.
- Dependent Care Assistance Plan: When applying the rules regarding reimbursements under a dependent care assistance plan, a same-sex spouse should be recognized.
- Health Savings Accounts (HSAs): A same-sex spouse will be recognized for purposes of determining eligibility to contribute and the contribution limit. If both spouses work for the same employer, keep in mind that the couple must now share a family HSA contribution, reducing their previous individual HSA maximum amounts by 50 percent.
What could employers be doing now?
Employers may want to communicate with employees about the changes in law and the implications of the IRS guidelines and request that employees review their plans if they believe their benefits have been impacted. For example, employers could request marriage certificates from same–sex couples who wish to qualify for pre-tax cafeteria plans. Employees could also be asked to examine their beneficiary designations to make sure, if they have a same-sex spouse, and have designated someone other than their spouse, that they have spousal consent to name an alternative beneficiary. The IRS Ruling failed to discuss whether the Ruling itself created a mandatory midyear enrollment right or create a HIPPA special enrollment right. Never-the-less, many employers are offering an enrollment window to allow employees to amend benefits based upon the change in law.Conclusion
No amendments are required to any ftwilliam.com documents (welfare and/or pension) as a result of the Windsor decision, IRS Ruling 2013-17, or DOL Technical Release No. 2013-04. No amendments are required because no ftwilliam.com documents define the term "spouse" and no documents address DOMA. This is not to say that the Windsor decision does not impact the operation of retirement and welfare plans on an ftwilliam.com document.If you have any questions please feel free to contact us at support@ftwilliam.com or call 800.596.0714.