Amending Retirement Plans for New 'Spouse' Definition

The recent release of Internal Revenue Service (IRS) Notice 2014-19 gives plan sponsors guidance for making sure language relating to spouses includes same-gender spouses as per the June 2013 Supreme Court decision in United States v. Windsor (see “Not All Retirement Plans Must Be Amended for Windsor”).

IRS Notice 2014-19 provides that retirement plans must recognize the marriages of same-gender couples as of June 26, 2013, the date of the Windsor decision. Plans are not required to change operations for events prior to that date, but retroactive application is permitted, if applicable qualification requirements are not jeopardized.

Anne Waidmann, director of PwC’s Human Resource Services, tells PLANSPONSOR, “It’s very helpful to DC plan sponsors in that it didn’t retroactively disqualify plans, since these plans were acting in compliance with then-current federal law. If retroactive disqualification had been enacted, it would’ve been extremely costly and difficult to recover payouts, especially since most employers would not have maintained plan-related records on same-sex spouses or domestic partners.”

As to the impact of the limited retroactive application on defined benefit plans, Joanne Jacobson, a principal with Buck Consultants tells PLANSPONSOR, “The limited retroactive application of the Windsor decision makes it easier for plan sponsors to achieve document compliance and ensure operational compliance.”

Notice 2014-19 calls for a retirement plan to be amended if its plan provisions are inconsistent with the Windsor decision—if it defines “spouse” by reference to Section 3 of the Defense of Marriage Act (DOMA) or only as between people of opposite genders.

Waidmann says, “Plan sponsors need to look at their plan documents and specifically at how they have the term ‘spouse’ defined. If a definition still makes reference to DOMA, then it definitely needs to be amended. However, if the language defines the term as ‘a spouse under federal law,’ that’s fine, and no amendment is required.” She says the deadline of December 31 should give plan sponsors enough time to carry out the process.

Jacobson adds: “Others also believe that even plans with only the word ‘spouse’ should be amended to clarify that spouse must include same-sex spouses. Many suggest amending the plan to read ‘spouse under federal law’ or ‘spouse, including same-sex spouses.’” She recommends plan sponsors have their legal counsel review Notice 2014-19 and have them specify and approve the final language to be used for the definitions.

The Washington, D.C.-based Waidmann says if defined contribution plan sponsors do need to amend their plans, the plan documents usually specify the methods by which this is achieved, be it through a plan committee or other means. Regardless of the plan-specific procedures for amendments, says Waidmann, plan sponsors need to remember to not only notify their recordkeepers of these changes to the plan, but also to communicate them clearly to participants. PwC published an analysis of the IRS notice— “Same-Sex Marriage Recognition Has Limited Retroactive Impact on Qualified Retirement Plans.”

Jacobson, also based in Washington, says, “In terms of amendments, the notice will affect defined benefit plans more than defined contribution plans, since defined benefit plans are more likely to require amendments to reflect a plans sponsor’s choice to apply the rules under the Windsor decision, prior to June 26, 2013, with respect to survivor annuities.” Buck Consultants released an analysis on the topic, “IRS Windsor Guidance Limits Retroactivity for Retirement Plans,” which Jacobson co-authored.

She clarifies, “Many plans do not define the terms ‘spouse’ or ‘legally married spouse’ any further and do not require amendments in this regard. Plans with choice of law provisions in states that do not recognize same-sex marriages, however, may need to be amended so as not to conflict with Windsor.”

Typically, she says, plan amendments are made by plan sponsors or their delegates, such as a benefits committee. “Plan sponsors should review their plan terms for compliance with the Windsor decision. If an amendment is required, it can be adopted by the committee at the next quarterly meeting or by consent resolution. Similarly, if a plan sponsor chooses to apply the rules prior to June 26, 2013, then it must also adopt conforming amendments. In that case, the sponsor must determine the effective date of the elective amendment and work with the recordkeeper in preparing communications with the participants and in determining who is affected by the amendment.”

Jacobson adds that plan operations must be reviewed to make sure they are consistent with the retroactive amendment. For example, if the plan sponsor decides to apply the rules prior to June 26, then if a participant in a same-sex marriage elected a single life annuity, the plan sponsor may provide the participant with the option to revise his or her election to a joint and survivor annuity. If the participant does not revise his or her election, then the plan sponsor must ensure that consent of the spouse to the life annuity is received.