By Austen K. Townsend
The Supreme Court’s decision on Section 3 of the Defense of Marriage Act in U.S. v. Windsor No. 12-307 (June 26, 2013) raises many issues for employers and other plan sponsors to consider about their qualified retirement plans. Section 3 of DOMA provided that the term “marriage” meant only a legal union between one man and one woman and the term “spouse” referred only to a person of the opposite gender. These definitions limited the availability of certain retirement benefits to same-gender partners, which the Supreme Court found unconstitutional.
Since then, on Aug. 29, the U.S. Treasury and IRS, which it oversees, issued important guidance for employee plan sponsors and participants on the impact of the Windsor decision. In Revenue Ruling 2013-17, the agencies ruled that a same-gender couple legally married in any jurisdiction will be recognized as spouses by the IRS for federal purposes, even if the couple resides in a jurisdiction that does not recognize the validity of their marriage. This “State of Celebration” rule will help employers and other benefit plan sponsors administer their plans uniformly for both same-gender and opposite-sex married couples. The ruling takes effect Sept. 16.
Here is an outline of which aspects of retirement plans are affected and some suggestions for next steps for plan sponsors and administrators to prepare for almost-certain changes ahead.
Affected Provisions
After the Windsor ruling, the following spousal protections and distribution rights under qualified retirement plans are now extended to same-gender spouses:
Qualified Domestic Relations Orders. Before the overturning of Section 3 of DOMA, a domestic relations order with respect to a same-gender spouse generally could not be qualified. Now, a divorcing same-gender spouse may be entitled to a portion of the participant’s retirement plan benefit as part of the divorce process by submitting a QDRO.
Loans. Under Section 3 of DOMA, if a plan required spousal consent for a participant to receive a plan loan or other distribution, same-gender spousal consent was not be required. After Windsor, plans that require spousal consent also will need to mandate same-gender spousal consent.
Hardship Distributions. Before Windsor, hardship distributions from retirement plans due to a same-gender spouse’s medical, tuition and funeral expenses were only allowed if the employer permitted hardship distributions for a “primary beneficiary,” and the same-gender spouse was designated as such. Now, a participant may be eligible to receive a hardship distribution from his or her plan account for those reasons if occurring with a same-gender spouse.
Qualified Joint and Survivor Annuity, Qualified Pre-retirement Survivor’s Annuity.
Defined benefit plans. Under all defined benefit plans, unless the participant’s spouse waives his or her right to the survivor benefit, the automatic form of payment for a married participant is a QJSA that provides benefits for the lifetime of the participant and a 50-percent (or more) survivor benefit for the surviving spouse for his or her lifetime. Before Windsor, QJSAs were not required to be offered to same-gender spouses. In addition, if a participant in a DB plan dies before retiring, the surviving spouse must receive a QPSA for his or her lifetime equal to 50 percent of what the participant would have received, unless the spouse elects another form of payment in accordance with the terms of the plan. Post-Windsor, a same-gender spouse now will automatically be entitled to this same benefit upon the participant’s death (unless waived).
Defined contribution plans. If a profit-sharing plan offers an annuity option, in the case of a married participant, the payment must be a 50-percent joint and survivor annuity with the surviving spouse as the beneficiary, unless the spouse consents to another form of payment. After the repeal of Section 3 of DOMA, profit-sharing plans that offer an annuity option must offer this form of payment to same-gender spouses. Profit-sharing plans with annuity options also must provide to a surviving spouse, when a participant dies prior to retirement, a pre-retirement survivor’s annuity purchased with 50 percent of the participant’s account balance. Again, post-Windsor, this pre-retirement survivor’s annuity must be offered to same-gender spouses. In the case of a profit-sharing plan that does not offer an annuity option, a participant’s surviving spouse receives the entire plan account, unless the spouse consents to another beneficiary. After Windsor, plans must now pay this death benefit automatically to a deceased participant’s same-gender spouse or otherwise require the consent of the same-gender spouse for a distribution or to name a beneficiary other than the spouse.
Austen K. Townsend is an associate in Proskauer Rose’s Employee Benefits, Executive Compensation & ERISA Litigation Practice Center in the firm’s Washington, D.C., office. She counsels clients on all aspects of employee benefits and executive compensation, including plan design and administration, compliance with the federal tax Code and ERISA, and the treatment of employee benefits in corporate transactions. Townsend is one of the contributing editors to the Guide to Assigning & Loaning Benefit Plan Money.
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