401(k) 401(k): Same-Sex Marriage Guidance

401(k): Same-Sex Marriage Guidance–Key Section of DOMA Ruled Unconstitutional

The Supreme Court recently struck down Section 3 of the Defense of Marriage Act (DOMA), which required same-sex spouses to be treated as unmarried for purposes of federal law. Under Section 3 of DOMA, same-sex marriages were not recognized for federal purposes even if recognized under state law. The Supreme Court’s decision left the definition of marriage to the states, and did not change Section 2 of DOMA, which allows states to refuse to recognize same-sex marriages performed in another state.

Same-Sex Marriage States

Same-sex marriages are permitted in California, Connecticut, Delaware, the District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota (effective August 1, 2013), New Hampshire, New York, Rhode Island (effective August 1, 2013), Vermont and Washington.

Additional Guidance Issued by Internal Revenue Service and Department of Labor

The Internal Revenue Service issued Revenue Ruling 2013-17 and two associated FAQs, regarding the federal tax treatment of same-sex marriages.  This guidance clarified that effective September 16, 2013, retirement plans must recognize the spouses of same-sex marriages.  This guidance addressed the following issues:

• “State of Celebration” Rule Applies:  Legally married same-sex couples will be treated as married regardless of where they live or work.  For example, a same-sex couple married in the state of California and now living in Indiana (which does not recognize sames-sex marriage) must be treated as married under a 401(k) plan of an employer located in Indiana.
• Domestic Partnerships and Civil Unions Not Included:  The Supreme Court specifically limited its decision to “lawful marriages.”  In addition, the Internal Revenue Service guidance does not recognize other formal relationships, such as registered domestic partnerships or civil unions.

On September 18, 2013, the Department of Labor (“DOL”) issued Technical Release 2013-04 which also states that the terms “spouse” and “marriage” under the Employee Retirement Income Security Act (“ERISA”) and related guidance should be read to include same-sex legally married couples under the “State of Celebration” rule.  In addition to this general guidance, the DOL intends to issue further guidance addressing specific provisions of ERISA and its regulations.

The recently issued guidance left a few unanswered questions:

• Retroactivity:  Future guidance will address how the new rules will be applied to actions taken before September 16, 2013.  For example, it is possible that an earlier non-spouse beneficiary designation may require a new beneficiary designation which includes the consent of a same-sex spouse.
• Plan Amendments:  Future guidance will also address the proper timing and content for plan amendments, if needed, to recognize same-sex marriages.  However, if current plan language specifically excludes same-sex marriage or defines spouse by a reference to DOMA, the plan sponsor may need to amend the plan immediately.

The plan sponsor should begin reviewing their plan documents, including summary plan descriptions, forms, and procedures, to locate provisions that define or refer to “spouse” or “marriage.”  Plan sponsors should also begin collecting data from plan participants on same-sex marriages in the same manner that they currently collect data on opposite-sex marriages.

Specific 401(k) Plan Issues to Consider

The terms of a 401(k) plan may include few or many provisions regarding spousal benefits.  Beginning September 16, 2013, same-sex marriage must be recognized in applying the following plan provisions.

• Beneficiary Designations:  A same-sex spouse is now a participant’s primary beneficiary and is required to consent to the designation of any other beneficiary.
• Qualified Domestic Relations Orders (QDROs):  A divorcing same-sex spouse may become entitled to a portion of a participant’s plan benefits by submitting a QDRO.
• Plan Loans:  If a 401(k) plan permits plan loans and requires spousal consent in order to receive a plan loan, the consent of a same-sex spouse is now required.
• Hardship Distributions:  A participant is now able to receive a hardship distribution from a 401(k) plan due to the medical, tuition, or funeral expenses of a same-sex spouse.  In the past, this was possible only if the 401(k) plan included a provision which allowed hardship distributions for a primary beneficiary and the participant had designated the same-sex spouse as his or her primary beneficiary.
• Rollover Rules:  A same-sex spouse who receives a plan distribution is now permitted to roll that distribution over to his or her own IRA or to another qualified plan.  In the past, a same-sex spouse was subject to the rules for non-spouse beneficiaries which permit only a direct rollover to an inherited IRA.
• Required Minimum Distributions:  A same-sex spouse of a participant who dies before beginning to receive payment of his benefit is now permitted to defer distributions until the date the participant would have reached age 70-1/2.  In the past, benefit payments generally would have been required to begin within one year after the participant’s death.
• Plan Distributions:  Most 401(k) plans provide only for lump sum payments.  However, if a 401(k) plan provides for distributions in the form of a qualified joint and survivor annuity and requires the consent of a spouse in order to elect to receive a form of payment that does not provide a spouse death benefit, these benefits and restrictions now apply in the case of a same-sex spouse.
• Technical Rights:  There are many other technical rules under a 401(k) plan which take into consideration whether the participant has a spouse.  A same-sex spouse is now considered the participant’s spouse in applying those technical rules related to issues such as benefit limits, plan disclosure requirements, nondiscrimination testing, and the right to bring benefit claims.

Compliancedashboard will be updated as more guidance is released describing how employers should handle the issues brought about by this ruling.