The Defense of Marriage Act (DOMA), enacted in 1996, is an all-encompassing statute that applies to more than 1,100 federal laws and regulations administered by various federal departments and agencies, including the Internal Revenue Service (IRS) and the Department of Labor (DOL). The recent decision by the Supreme Court striking down certain sections of DOMA has already begun affecting benefit plans, including 401(k) qualified retirement plans.
The case of United States v. Windsor* originated when a legally married same-sex spouse was denied the federal estate-tax marital exemption after her partner died. She had to pay more than $360,000 in estate taxes on inherited assets and sued the IRS in an attempt to receive a refund. However, the spousal exemption on federal estate tax was not granted because DOMA did not permit the couple’s same-sex marriage to be recognized under federal income-tax laws.
DOMA Section 3 defines the term “marriage” to be between one man and one woman and the term “spouse” to be a person of the opposite sex who is a husband or wife, which precludes same-sex couples from being married under federal law.
Qualified plan spousal rights
Under DOMA, spousal rights were not available to same-sex partners, and the following retirement plan provisions did not apply:
- Spousal consent was not needed to name someone other than the spouse as beneficiary.
- Qualified joint and survivor annuity (QJSA) requirements or protections were not provided.
- Spousal consent was not required for distributions, loans, or hardship withdrawals.
- Hardship distributions made on behalf of the spouse’s hardship were not available.
- Required minimum distribution joint life tables where the spouse is more than ten years younger could not be used.
- A deceased participant’s plan assets could not be rolled over by a same-sex spouse into his or her own IRA.
- Qualified domestic relations orders (QDROs) were not applicable.
- Rollover privileges available only for a spouse (such as rolling over an IRA to the surviving spouse’s own IRA) were not available.
- Family attribution rules used in determining highly compensated employees, key employees, and controlled groups did not reflect the spousal relationship in same-sex marriages.
Supreme Court decision
On June 25, 2013, in a five to four decision in United States v. Windsor, the U.S. Supreme Court ruled that Section 3 of DOMA was an illegal denial of equal protection rights guaranteed by the Constitution. This landmark decision has a major impact on retirement plan spousal benefit rules. In states that allow same-sex marriage, same-sex partners will now have the same rights that have always been available to opposite-sex married partners.
Section 3 of DOMA: “In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or wife.”
However, the ruling did not invalidate Section 2 of DOMA, which permits states that do not allow same-sex marriages to refuse to recognize such marriages. As a result, the changes made to Section 3 of DOMA appear to be much clearer at this time in instances when same-sex partners reside in states where same-sex marriages are recognized.
Section 2 of DOMA: “No State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship.”
Same-sex marriage states**
We are in uncharted territory. At the time DOMA was enacted, there were no states that recognized same-sex marriage. Massachusetts became the first state to permit same-sex marriage in 2004. Currently, same-sex marriages are authorized in California, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, Vermont, Washington, and Washington, D.C.
States that recognize domestic partnerships or civil unions are not directly affected by the Windsor decision. The purpose of civil unions and domestic partnerships is to afford individuals some of the benefits of marriage (such as medical power of attorney) without actually recognizing the relationship as a marriage. States with civil unions include Colorado, Hawaii, Illinois, and New Jersey. Those with domestic partnerships are Nevada and Oregon. Since domestic partnerships and civil unions are not marriages, recognition of a same-sex spouse is not required but may be permitted.
More questions than answers
The DOMA decision creates many more questions than it answers, and plan sponsors and administrators have no precedent to follow. Current state laws determine who is a spouse for purposes of determining if two individuals are legally married. However, retirement plans are governed by federal law. Right after the Supreme Court decision, there was confusion as to how to administer retirement plans when different states did not recognize a same-sex marriage validly celebrated in another state. Recent IRS guidance has clarified that the place of the marriage’s celebration determines the law for the marriage that will be recognized for federal income-tax purposes, including qualified plans — regardless of whether a state recognizes same-sex marriages.
There may be many additional issues requiring statutory or regulatory fixes that will take time to settle as they work their way through the state and federal legal systems.
Treasury, IRS, and DOL guidance
The Treasury Department and the IRS have issued guidance (Revenue Ruling 2013-17 and FAQs) regarding how the DOMA decision applies to the filing of federal income-tax returns and qualified plans. The ruling covers same-sex marriages entered into in one of the 50 states, Washington D.C., a U.S. territory, or a foreign country. It does not cover domestic partnerships, civil unions, and similar arrangements.
The Treasury/IRS ruling generally requires same-sex couples to file their federal tax returns as married (either married filing jointly or married filing separately) as of the 2013 tax year. If the couple was married in a state that recognizes same-sex marriage and now resides in a state that does not, the couple must still file as married. In addition, an amended federal tax return may be filed for all open years (2010, 2011, and 2012).
In the revenue ruling’s accompanying FAQs, the IRS stated, “A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.” “. . . a qualified plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.” For ERISA purposes, the DOL guidance (Technical Release No. 2013-04) agrees.
Future IRS guidance will address how the IRS will apply the Supreme Court’s decision retroactively to employee benefit plans, specifically to plan sponsors, the plan or arrangement, employers, affected employees, and beneficiaries. This is particularly critical for defined benefit plans and plans subject to spousal consent where distributions have already occurred.
More guidance clarifying the impact of the DOMA ruling on retirement plan administration will be forthcoming. This newsletter will address changes as they occur. In the meantime, plan sponsors (especially those in states that recognize same-sex marriage) can consider some best practice action steps, including:
- Reminding all plan participants to review their current beneficiary designations to ensure they are accurate and up to date.
- Recording same-sex marriage as a status code for your human resource records.
* United States v. Windsor, 570 U.S. __ (2013)
** As of April 1, 2014 If you have any questions about the tax provisions in the health care reform laws, please contact us at 847-267-9600. We will be following developments as they ensue after the Supreme Court issues its decision.