Author, Donna Edwards, Atlanta, +1 404 572 2701, dedwards@kslaw.com.
The short answer: No plan amendments are required, but certain plan amendments and operational changes are permitted, and certain operational changes may be required.
The IRS in December 2015 released Notice 2015-86 (the “Notice”) providing guidance on the application of the Supreme Court’s Obergefell decision1 to tax-qualified retirement plans and to health and welfare plans, including cafeteria plans. The Notice relates solely to the application of federal tax law with respect to same-sex spouses.
Background
Prior to the Supreme Court’s 2013 decision in Windsor,2 the Defense of Marriage Act prohibited recognition of same-sex spouses for purposes of federal tax law. As we previously reported, the Supreme Court’s holding in the Windsor decision resulted in the recognition of same-sex marriages for federal tax law purposes.
Following the Windsor decision, the IRS adopted, for federal tax law purposes, a general rule - known as the “state of celebration” rule - recognizing same-sex marriages validly entered into in a state whose laws authorize same-sex marriage, even if the couple resided in a state that did not recognize the validity of the marriage. In addition, the IRS issued additional guidance applying the Windsor decision and the state of celebration rule to qualified retirement plans, employment taxes, and elections and reimbursements for same-sex spouses under cafeteria plans, flexible spending arrangements, and health savings accounts.
In June 2015, the Supreme Court held in the Obergefell decision that a state’s civil marriage laws must apply to same-sex couples on the same terms and conditions as opposite-sex couples, and that each state must recognize a lawful same-sex marriage performed in another state.
As a result of the Obergefell decision, certain same-sex marriages performed in previous periods will now be recognized for the first time for state law purposes. However, because these same marriages have already been recognized for federal tax law purposes pursuant to the Windsor decision and the subsequent IRS guidance, the IRS states in the Notice that it does not anticipate any significant impact from the Obergefell decision on the application of federal tax law to employee benefit plans.
Health and Welfare Plans
No Amendments Required: The Notice clarifies that a sponsor of a health or welfare plan is not required to change the terms or operation of its plan for federal tax law purposes as a result of the Obergefell decision. The Notice reminds plan sponsors that federal tax law generally does not require health and welfare plans to offer any specific rights or benefits to the spouse of a participant, and that to the extent that a health or welfare plan does offer benefits to the spouse of a participant, the federal tax treatment of the benefits that are provided to a same-sex spouse has already been addressed in earlier IRS rulings.
Possible Change in Plan Operations: The Notice explains, however, that if a health or welfare plan does offer benefits to the spouse of a participant, the Obergefell decision could require changes to the operation of the plan to the extent that the decision results in a change in the group of spouses eligible for coverage under the terms of the plan. For example, if the terms of a health or welfare plan provide that coverage is offered to the spouse of a participant as defined under applicable state law, and the plan administrator determines that applicable state law has expanded to include same-sex spouses as a result of the Obergefell decision, then the terms of the plan would require coverage of same-sex spouses as of the date of the change in applicable state law.
Cafeteria Plan Issues: The Notice explains that certain mid-year election changes may be permitted under a cafeteria plan as a result of the Obergefell decision. For example, if as of the beginning of a plan year a health or welfare plan that is offered under a cafeteria plan does not permit coverage of same-sex spouses, and the terms or operation of the plan change during the plan year to permit coverage of same-sex spouses, then the cafeteria plan may permit a participant to revoke an existing election and submit a new election as long as the terms of the cafeteria plan allow a participant to make a change in coverage due to a significant improvement in coverage during the coverage period under an existing coverage option.
If the terms of a cafeteria plan do not currently allow participants to make a change in election due to a significant improvement in coverage during the coverage period under an existing coverage option, the plan sponsor may amend the terms of the plan to allow such an election as long as the amendment is adopted no later than the last day of the plan year including the later of (i) the date same-sex spouses first became eligible for coverage under the plan, or (ii) December 9, 2015. Such an amendment may be retroactive to the date same-sex spouses first became eligible for coverage under the plan.
Qualified Retirement Plans
No Amendments Required: As with health and welfare plans, the Notice clarifies that plan sponsors are not required to make additional changes to the terms or operation of its qualified retirement plans for federal tax law purposes as a result of the Obergefell decision. As we previously reported, IRS Notice 2014-19 (the “2014 Notice”) already required qualified retirement plans to be amended to reflect the Windsor decision and the 2014 Notice no later than December 31, 2014 (or a possible delayed amendment deadline for governmental plans).
Discretionary Amendments Permitted: The Notice explains that a plan sponsor may decide to amend its plan following the Obergefell decision to make certain optional changes or clarifications.
New Rights or Benefits: Following the Obergefell decision, some plan sponsors might decide to make discretionary plan amendments to provide new rights or benefits with respect to participants with same-sex spouses. For example, such an amendment may provide participants who commenced a single life annuity distribution (a “SLA”) prior to the Obergefell decision with an opportunity to elect a qualified joint and survivor annuity form of distribution (a “QJSA”) as of a new annuity starting date. The Notice cautions that any such amendment must comply with the applicable qualification requirements (such as the nondiscrimination requirements of section 401(a)(4)).
Retroactivity: The 2014 Notice allowed a qualified retirement plan to be amended to recognize marriages of same-sex couples on a retroactive basis as of a date earlier than the date of the Windsor decision. If a plan sponsor did not make such a retroactive amendment following the issuance of the 2014 Notice, the Notice clarifies that the qualified retirement plan may now be amended to recognize marriages of same-sex couples on a retroactive basis for certain purposes as described in the 2014 Notice. Such an amendment will not cause the plan to lose its qualified status, provided the amendment otherwise complies with the 2014 Notice 2014 (for example, the amendment must comply with applicable qualification requirements).
Code Section 436: The Notice further clarifies that any amendment to a single-employer defined benefit plan expanding coverage in response to the Obergefell decision will be subject to the limitations under Code Section 436(c). These limitations generally provide that a discretionary amendment that increases the liabilities of a single-employer defined benefit plan cannot take effect unless the plan’s adjusted funding target attainment percentage is sufficient or the plan sponsor makes an additional contribution as specified under those rules.
Deadline for Adopting Amendments: The Notice also clarifies that amendments to a qualified retirement plan contemplated by the Notice are discretionary (as opposed to “interim”) amendments, which means that the deadline to adopt such an amendment is generally the end of the plan year in which the amendment is operationally effective (subject to certain exceptions for a governmental plan).
What This Means for Plan Sponsors
No plan amendments are required to either health and welfare plans or qualified retirement plans as a result of the Obergefell decision. However, a plan sponsor may decide to amend its plans in accordance with the guidelines in the Notice to make certain optional changes, such as allowing cafeteria plan mid-year election changes or allowing qualified retirement plan participants who commenced a SLA prior to the Obergefell decision with an opportunity to elect a QJSA as of a new annuity starting date. In addition, the Obergefell decision may require changes to the operation of a health and welfare plan to the extent that the decision results in a change in the group of spouses eligible for coverage under the terms of the plan.
1 Obergefell v. Hodges, 135 S. Ct. 2584 (2015).
2 U.S. v. Windsor, 133 S. Ct. 2765 (2013).
