How the Windsor Decision Affects Retirement Plans

windsorSpouses of employer-sponsored retirement plan participants have certain rights when it comes to the plans. Because of this, the legal definition of “spouse” is very important to both plan sponsors and plan participants in understanding how a retirement plan works.

On June 26, 2013, in United States v. Windsor, the U.S. Supreme Court struck down as unconstitutional Section 3 of the 1996 Defense of Marriage Act (DOMA). Section 3 of DOMA stated that the definition of marriage was limited to the union of one man and one woman. The Windsor decision means that federal law recognizes same-sex couples married under state law; same-sex couples are now able to receive federal benefits and protections that were previously afforded only to opposite-sex married couples. The decision does not, however, require individual states to recognize same-sex marriages.

Pursuant to the Windsor ruling, the Internal Revenue Service (IRS) and the Department of Labor (DOL) released guidance stating that same-sex couples married in a state where same-sex marriage is legal (“state of celebration”) are recognized under federal law for tax and employee benefit purposes. What this means for qualified retirement plans is that spousal plan provisions are extended to same-sex spouses, even in states where same-sex marriages are not recognized, provided the marriage took place in a state that recognized same-sex marriage. In April of this year, the IRS issued further guidance to help retirement plan sponsors determine when the law officially applies (i.e., answering questions surrounding retroactivity) and whether plan documents need to be amended.

For employers
Employers will want to take note of a few dates:

  • June 26, 2013: Plans must recognize same-sex spouses of participants as of this date to reflect the Windsor decision.
  • September 16, 2013: This is the first applicable date when the state of celebration rule must apply. The period between June 26 and September 16, 2013, is considered transitional–employers that recognized same-sex married couples only in cases where the participant was domiciled in a state that recognized same-sex marriages will not be treated as failing to meet the requirements.
  • The later of December 31, 2014, or the end of the plan’s normal amendment period: Any plan documents that currently have language that is not consistent with the Windsor decision (e.g., any documents that reference the definition of marriage in Section 3 of DOMA, specify recognition based on state of domicile rather than celebration, or are inconsistent with Windsor in any way) must be amended to comply with current law.

Note that not all plans will need amendments–those whose language is neutral enough to be consistent with Windsor will be in compliance, provided they operate in accordance with the new law as of June 26, 2013. In addition, employers may choose to adopt amendments recognizing same-sex marriages prior to June 26, 2013; however, the IRS cautions this may result in complications and “may trigger requirements that are difficult to implement retroactively … and may create unintended consequences.”*

Employers that previously extended benefits to domestic partnerships or civil unions may want to carefully consider the ramifications of any decisions made or amendments drafted that may cut back those benefits. For example, employers may choose to grandfather in couples who were covered prior to June 26, 2013, rather than remove their partner benefit provisions outright.

For plan participants
For you, a key issue revolves around beneficiary designations. Many married participants–in both same-sex and opposite-sex relationships–are not aware that their spouse is automatically their plan beneficiary. For this reason, participants might want to review their beneficiary designations to ensure that they conform with both their wishes and the law.

If the spouse is not the plan participant’s desired beneficiary, then the spouse must waive his or her right in writing. For example, if you would prefer that your child be the primary beneficiary, then your spouse must sign a consent form waiving rights to be your primary beneficiary.

Divorce is another situation that should be considered, as same-sex spouses can now be covered under a qualified domestic relations order, which is a legal order documenting how retirement assets will be divided.

Other provisions that may be affected by the law include loans, hardship withdrawals, and annuity payments in retirement (depending on the type of plan and its terms). Participants considering taking money out of their plans for any reason may want to review the rules with regard to spousal consent or applicability to ensure they understand the requirements.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014


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