Earlier this year, the IRS issued Notices 2014-19 and 2014-37 to provide additional guidance on the application of the U.S. Supreme Court's Windsor decision to qualified retirement plans and 403(b) plans. In U.S. v. Windsor, the U.S. Supreme Court essentially ruled that, for all Federal purposes, the term "spouse" includes any individuals who were lawfully married under any state law or other jurisdiction, including individuals married to a person of the same sex.
In Notice 2013-17, its first item of guidance following the Windsor decision, the IRS adopted a "place of celebration" rule for Federal tax purposes, which recognizes a marriage of same-sex individuals that was validly entered into in a state whose laws at the time authorized same-sex marriages, even if the married couple is domiciled in a state that does not recognize such marriages. That approach is in contrast to a "place of domicile" rule that would have recognized same-sex marriages only if a couple resided in a state that recognized such marriages.
The most recent notices from the IRS provide additional guidance regarding the application of Windsor to qualified retirement plans, including the retroactive application of the decision and the plan amendments that may be required to reflect the decision and plan operations.
The new guidance confirms that qualified retirement plans and 403(b) plans should have begun operating in compliance with the Windsor decision as of June 26, 2013, which is the date the decision was issued by the U.S. Supreme Court. For this purpose, the guidance clarifies that from June 26, 2013, until September 16, 2013, the date Revenue Ruling 2013-17 was published, a plan could operate under either the place of celebration rule or the place of domicile rule. On and after September 16, 2013, a plan must operate under the place of celebration rule.
The new guidance also provides that a plan can be amended and operated to reflect the outcome of the Windsor decision as of a date earlier than June 26, 2013. Such an amendment and plan operations could apply for all purposes under a plan or for only certain designated purposes. For example, a plan could treat same-sex and opposite-sex spouses the same solely for purposes of the qualified joint and survivor annuity (QJSA) and qualified preretirement survivor annuity (QPSA) requirements that apply to participants with annuity starting dates or dates of death on or after a specified date.
Nonprofit organizations that are exempt from Federal income tax under Code section 501(c)(3) and certain educational organizations can maintain 403(b) plans, which are tax-favored plans similar to qualified retirement plans, but with several key differences (e.g., the amounts contributed under a 403(b) plan generally must be invested in either annuity contracts or mutual funds). Although 403(b) plans generally must comply operationally with the IRS's interpretation of the Windsor decision as described above, 403(b) plans do not have to be amended by the end of this calendar year like qualified retirement plans. Rather, the deadline for amending 403(b) plans to reflect the Windsor decision is the end of the preapproved plan remedial amendment period, which has not yet been announced by the IRS.
Whether a qualified plan needs to be amended to comply with the new rules depends on the specific terms of the plan.
If the terms of a plan are consistent with the Windsor decision, then the plan generally does not need to be amended. For example, a plan that defines a spouse as "a spouse under Federal law" is consistent with the Windsor decision and does not need to be amended. However, the recent guidance suggested that a plan sponsor in this situation may still want to consider making a clarifying amendment for purposes of plan administration.
In contrast, if the terms of a plan conflict with the Windsor decision, then the plan must be amended to comply with the decision. For example, a plan that defines a spouse as "the opposite-sex spouse of a participant" must be amended to comply with the Windsor decision.
In addition, if a plan chooses to apply the Windsor decision to a period of time before June 26, 2013, then the plan must be amended to specify the date as of which the decision will be applied and the purposes for which it will be applied. For example, if a plan will treat same-sex and opposite-sex spouses the same for QJSA and QPSA purposes for participants with annuity starting dates or dates of death on or after January 1, 2013, then the plan must be amended to include those specific terms.
If a plan amendment is required (or a plan sponsor decides to make a clarifying amendment), then a qualified retirement plan must be amended by the later of (i) the close of the plan's remedial amendment period, or (ii) December 31, 2014. The guidance includes a special amendment timing rule for governmental plans, which provides that an amendment does not need to be adopted before the close of the first regular legislative session of the legislative body with the authority to amend the plan that ends after December 31, 2014.
The IRS issued Notice 2014-37 to clarify the timing of Windsor plan amendments for safe harbor 401(k) plans. The IRS takes the position that safe harbor 401(k) plans generally cannot be amended during a plan year to make mid-year changes, with certain limited exceptions. The most recent notice clarifies that safe harbor 401(k) plans can make mid-year amendments to reflect the Windsor decision.
The recent notices also provide other guidance, including, but not limited to, special amendment rules that apply to single employer defined benefit plans that are subject to certain restrictions under Code section 436(c) because their funded status is below certain thresholds.
If not already done, nonprofit organizations should begin immediately to review their qualified retirement plan and 403(b) plan documents and operations to determine whether any changes need to be made before the end of this year to reflect the Windsor decision.