Thursday, October 31, 2013

The Impact of U.S. v. Windsor on Retirement Plans

Supreme Court Ruling on the Defense of Marriage Act 

The U.S. Supreme Court in a landmark case ruled on June 26, 2013, that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional. Section 3 of DOMA defined “spouse” for the purposes of federal law as a person of the opposite sex and that a “marriage” only applied to opposite-sex partners.

In addition to the social and historical implications of this ruling, U.S. v. Windsor has a direct effect on all Qualified Retirement Plans. Under the ruling, to maintain their tax qualified status, plans must recognize same-sex married couples and provide the same benefits as they would to a participant married to a member of the opposite sex. Plan sponsors should specifically review the following areas:

  • Qualified Joint and Survivor Annuities (QJSAs): Married participants in some Qualified Retirement Plans must receive their benefits paid from the plan in the form of a QJSA, an annuity product through which the participant receives periodic payments while living and his or her spouse receives a percentage of those payments after the participant’s death, unless the spouse has waived the right to the QJSA. Under the ruling, same-sex spouses will now be protected by the QJSA requirement and an employee in a same-sex marriage will need spousal consent in order to elect an alternate benefit form.
  • Qualified Pre-Retirement Survivor Annuities (QPSAs): Under the ruling, a same-sex spouse will be automatically entitled to a death benefit should a participant die prior to retirement, unless he or she specifically waives this right in writing.
  • Eligible Rollover Distributions: Same-sex spouses will now be allowed to roll over a deceased participant’s benefits to their own IRA or other Qualified Retirement Plan.
  • Hardship Distribution: Same-sex spouses will be included in the hardship definition that allows withdrawals for a spouse’s medical bills, tuition, or funeral expenses.
  • Qualified Domestic Relations Orders (QDROS): A divorcing same-sex spouse will be entitled to a portion of a participant’s plan benefits as part of the divorce process by submitting a qualified domestic relations order to the plan sponsor.
  • Minimum Required Distributions: Same-sex spouses will be allowed to delay taking distributions until a deceased participant would have reached the age of 70½ years.
It is important to remember that the Supreme Court’s ruling was solely on Section 3 of DOMA, which recognizes same-sex marriage at a federal level. The Court did not address Section 2 of DOMA, which allows states to refuse to recognize the validity of same-sex marriages that were performed out of state. As of today, 14 states, including the District of Columbia, allow same-sex marriages. An additional four states recognize same-sex civil unions; however, the federal benefits granted by the Supreme Court only apply to legally married couples.

Questions remain as to how employers should treat same-sex married couples residing in states that do not recognize same-sex marriages. It may be the responsibility of employers to track the states in which same-sex couples live for benefits purposes.

Employers should:
  • Proactively obtain same-sex marriage information from participants/beneficiaries. Consult with your retirement plan advisor on how to proceed regarding the issue of same-sex married participants and states that may not recognize out-of-state same-sex marriages.
  • Review the Plan Document and the Summary Plan Description. Any DOMA language should be removed and the definition of “spouse” should be reviewed to make sure it includes same-sex spouses. 
In conclusion, the U.S. v. Windsor ruling has made a significant impact on retirement plans. Strategic Benefit Services expects additional guidance from the Department of Labor and Internal Revenue Service on this ruling to be forthcoming. As new information is released, plan sponsors should consult with retirement plan advisors to help guide you through any retirement plan changes.

If you have any questions about DOMA's impact on your organization’s retirement plan or would like to speak with an advisor about reviewing or establishing a plan, please contact us at (855) 882-9177 or via e-mail at sbs@hanys.org.