IRS issues new health and welfare plan guidance in wake of Obergefell decision

The IRS has issued guidance for employers with respect to their qualified retirement plans and health and welfare plans in the wake of the U.S. Supreme Court’s recent decision in J. Obergefell v. R. Hodges,

Background. In E. Windsor, the Supreme Court held that the federal government must recognize same-sex marriages lawfully performed in states that recognize same-sex marriage. Thereafter, the IRS adopted the “celebration rule” for recognizing a same-sex marriage. As long as the couple was lawfully married in a state that recognized same-sex marriage, they would be treated as married for federal tax purposes whether they lived in a state that recognized same-sex marriage or not (Rev. Rul. 2013-17, I.R.B. 2013-38, 201).

The IRS subsequently issued guidance stating that it required employers to amend their plans in accordance with its recognition rules. It also permitted employers to amend plans to go beyond the basic requirements in certain situations. For example, they could extend benefits to same-sex marriages that pre-dated June 26, 2013 (the date Windsor was decided), or to allow retirees who had already begun to receive single life annuity distributions to elect a qualified joint and survivor annuity instead.

In Obergefell, the Supreme Court determined that states must allow same-sex marriages and they must recognize such marriages when performed in other states. Obergefell did not change the federal tax law. However, the IRS recognizes that employers may want to take the occasion to broaden retirement benefits in the wake of the decision and employers may have transitional issues with respect to their health and welfare plans.

The IRS is clarifying that no changes to the terms of a health or welfare plan are required due to Obergefell. If a health or welfare plan does offer benefits to the spouse of a participant, however, Obergefell 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 Obergefell, then the terms of the plan would require coverage of same-sex spouses as of the date of the change in applicable state law.

Health and welfare plans. A cafeteria plan that allows participants to make a change in election due to a significant improvement in coverage under an existing coverage option may permit a participant to revoke an existing election and submit a new election if same-sex spouses first become eligible for coverage under the terms of the plan during the coverage period for any reason. This new election may be an election by a participant to add coverage for a same-sex spouse to a benefit option in which the participant is already enrolled, or an election by a participant who had not previously elected coverage to add coverage for the participant and a same-sex spouse.

If the terms of a cafeteria plan do not 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 plan at any time to permit participants to make a change in election. In the case of a change due to the plan recognizing same-sex marriages, the amendment must be 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.

Retirement Plans. The IRS is permitting employers to make discretionary amendments to broaden benefits to same-sex spouses. Single-employer plans must be sufficiently funded for the change and any amendment must otherwise comply with the qualified plan rules (including nondiscrimination).

SOURCE: IRS Notice 2015-86, I.R.B. 2015-52, December 28, 2015.

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