Transitional Period Needed to Adjust for DOMA Ruling

As a result of the U.S. Supreme Court decision about the Defense of Marriage Act (DOMA), the IRS had issued Revenue Ruling 2013-17 (see “Same-Sex Marriages Recognized for Tax Purposes”) and two sets of FAQ, which mentioned future guidance about how qualified retirement plans and other tax-favored retirement arrangements must comply. This future guidance will address points such as plan amendment requirements and corrections relating to plan operations for periods before future guidance is issued.

ASPPA made several recommendations related to these two points, one of which included nondiscrimination and similar types of testing. ASPPA suggested to the IRS that no changes should be required to testing results for prior-year plans with regard to nondiscrimination and coverage testing for plan years prior to July 21, 2013.

The definition of highly compensated employees under IRC Section 414(q) and of key employee under IRC Section 416(i) are impacted by Windsor. These definitions, in turn, affect nondiscrimination, coverage and top-heavy testing. In addition, family attribution and constructive ownership rules for stock ownership under IRC Sections 414 and 318 must now take same-gender spouses into account. However, ASPPA noted that plan sponsors do not necessarily keep data tracking same-gender spouses. Using the aforementioned plan year cut-off date, plan sponsors and recordkeepers would be given sufficient time to update their plan designs and administrative systems to factor in these changes.

Other ASPPA recommendations included:

Plan documents should not require interim amendments, relating to the definition of “spouse” and to the correction of gender-specific language, prior to the plan’s next remedial amendment cycle. ASPPA’s rationale is that the definition of spouse is not a required element for plan qualification. The letter cited the fact that the definition of spouse has historically been presumed to be that of any applicable law and that the fact that the law has been modified does not necessitate a plan amendment. In between now and the next amendment cycle, ASPPA recommended plans be administered using an operational definition of spouse that is gender neutral.

Plan distributions carried out under pre-Windsor rules should be deemed compliant, having been done in good faith. ASPPA believes the IRS should grant relief for the full processing of distributions, including loans and in-service withdrawals, for plans that are subject to Internal Revenue Code (IRC) Sections 411(a)(11) and 417, or ERISA Section 205, which were completed prior to July 21, 2013. In addition, ASPPA recommended the IRS grandfather the complete processing of such payments and recognize plans as having complied in both form and operation with the IRC and ERISA. In terms of benefit payment types, this recommendation would affect benefits in pay status, elected benefits not in pay status, required minimum distributions and rollovers, which would be subject to certain considerations that are outlined in its letter.

Pre-Windsor actuarial valuations should not be required to be revised and liabilities from the decision should be treated the same as those from a plan amendment once it is adopted or required to be adopted. ASPPA’s rationale here is that actuarial valuations performed prior to July 21, 2013, were based on laws and regulations that were understood at the time. Plan actuaries cannot know the extent of any retroactive requirement and will not know of any choice made within the framework of the guidance. Additionally, ASPPA feels that retroactive application of Windsor for funding and benefit restriction purposes would be impractical and unfair to both plan sponsors and participants.

Participant and spouse notifications should not be required, and the IRS should use educational outreach to communicate the impact of Windsor to those affected by it. ASPPA contended there are no IRS rules or procedures in place for affirmatively notifying participants of the need to update their marital status, regardless of the gender of either spouse. Also, it pointed to the fact that many plan sponsors do not maintain data on same-gender spouses. Taking all this into account, ASPPA believes it would be a burden for plan sponsors and administrators to carry out these additional notification requirements. However, ASPPA does say that going forward, plan administrators should be required to modify forms where there are gender-specific spousal references.

ASPPA comments were prepared by a task force from their Government Affairs Committee. The full text of their letter to the IRS can be found here.