On April 4, 2014, the IRS issued Notice 2014-19, requiring that qualified retirement plans apply “spouse” and “marriage” to same-sex spouses just as the plan would to opposite-sex spouses and establishing criteria for what plan amendments are needed and the timing for doing so.

Background

In September of 1996, Congress enacted the Defense of Marriage Act (DOMA), which provided that same-sex marriages would not be recognized under federal law. On June 26, 2013, however, the U.S. Supreme Court held in the Windsor case that DOMA’s treatment of such marriages was unconstitutional. Following Windsor, the IRS issued Revenue Ruling 2013-17 on August 29, 2013 (effective September 16, 2013), requiring same-sex marriages legally performed under state law to be recognized for federal tax purposes in any state regardless of whether the state recognizes the validity of same-sex marriages. This Revenue Ruling further provided that individuals who entered into registered domestic partnerships, civil unions, or other similar relationships under state law did not qualify as “spouses” and that these relationships did not qualify as “marriages” for federal tax purposes.

The newly issued April 4 Notice gives further guidance respecting qualified retirement plans on a wide range of subjects including qualified joint and survivor annuity rules, the Retirement Equity Act’s spousal beneficiary safeguards, required minimum distribution calculations and timing, control group determinations, ESOP rules, and the QDRO exceptions to the Code’s anti-alienation rules.

Notice 2014-19

The new IRS Notice describes when qualified retirement plans must be in administrative and documentary compliance with Windsor and the August 2013 Revenue Ruling. Plan sponsors and recordkeepers must have been administering their retirement plans consistent with Windsor as of June 26, 2013, even if these plans did not contemplate valid same-sex marriages. The corollary to this is that failing to recognize same-sex marriages before June 26, 2013, will not disqualify a plan. Furthermore, because last summer’s Revenue Ruling was not effective until September 16, 2013, there will be no risk of disqualification during the gap period between the effective date of Windsor and September 16 for plans that recognized same-sex marriages only if a participant was domiciled in a state that recognized same-sex marriages. The IRS further clarified that plan sponsors could operate their plans prior to June 26, 2013 to reflect Windsor on some or all qualification requirements without risk of disqualification so long as the basic qualification rules were satisfied, i.e., plan sponsors could be more generous than the Code required if it was feasible administratively.

From a documentation standpoint, all qualified retirement plans must be consistent with Windsor and both the IRS Revenue Ruling and the new Notice. Depending on how a plan uses or defines the terms “spouse” and “marriage,” plan amendments may or may not be needed. If a plan uses or defines these terms in a neutral manner without reference to “opposite-sex” or DOMA and they can be reasonably construed in harmony withWindsor and the IRS guidance, then no plan amendment is likely needed. However, if a plan couches the terms “spouse” and “marriage” in accordance with DOMA or inconsistently with Windsor, then the plan will need to be amended retroactively to June 26, 2013 to maintain its qualified status.

The deadline for adopting any needed amendments is generally going to be December 31, 2014, although for some plan sponsors, the amendment deadline could be later depending on their unique circumstances.

Next Steps

In response to Notice 2014-19, plan sponsors will need to review the terms of their retirement plans to ensure each plan contains a proper definition of “spouse” and “marriage” and to timely amend their plans, as necessary. Additionally, plan sponsors should confirm the administrative aspects of their plans with their recordkeepers. Based on all of this, Notice 2014-19 is welcome news as it provides certainty: individuals can better plan their benefits and retirements, recordkeepers can confidently begin any needed programming and website changes, and plan sponsors can undertake any needed revisions to their plan documents, summary plan descriptions and other communications.

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There are many generous tax benefits that come from having a “qualified” retirement plan (such as a section 401(k) plan). For example, as an employer, you can deduct your plan contributions, but participating employees don’t have to recognize the contributions as income until they receive a distribution; usually many years later. However, those tax benefits disappear if your plan loses its qualified status.

What can cause a plan to lose its qualified status?

Several things, but there are three types of problems that frequently arise:

• Failure to adopt required plan amendments in a timely fashion. The IRS issues reams of guidance that require plan amendments. Fail to adopt even one on time, and your plan is technically disqualified.
• Failure to administer the plan in accordance with its terms. Your plan document probably contains hundreds of pages of fine print and technical jargon. Most employers have never read it, at least not all the way through. But you are required to follow it to the letter. Slip up one time and your plan can be considered disqualified.
• Failure to satisfy the Internal Revenue Code’s various tests. The Code contains a number of mathematical tests which specify who must benefit from the plan and what benefits must be provided. These tests also prohibit “discrimination” in favor of highly compensated employees and others. Many of those tests are extremely complex and easy to violate. Fail one of them, and fail to correct it within the allowable time periods, and your plan will be disqualified.

How to correct qualification failures

Luckily the IRS has provided ways to correct most qualification failures. For example, their “Employee Plans Compliance Resolution System” or “EPCRS” allows plan sponsors to correct qualification failures through a variety of methods, such as employer contributions, retroactive amendments and corrective distributions. Generally those corrections are designed to put the plan in a position as if the qualification error had not occurred. But these require experienced and knowledgeable advisors to navigate.

Conclusion

To help avoid disqualification, make sure that:

• Your advisors are monitoring your plan to help eliminate potential causes of disqualification.
• Your plan document is up to date, and matches the way you actually administer your plan. Don’t make a change to your plan without telling your document provider and third party administrator.
• Someone in your organization is reviewing your plan’s discrimination testing and dealing with violations.

If you see a problem, correct it as soon as possible – before the IRS audits you. This way you can keep your qualified plan “qualified.”

© 2012 Dinsmore & Shohl LLP

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