Supreme Court’s recognition of same-sex marriage will further extend spousal rights to retirement benefits

The recent Supreme Court decision validating same-sex marriage as a Constitutionally protected right will have significant employee benefit ramifications for individuals as well as employers and plan administrators. By extending the fundamental right of marriage to same-sex couples, the decision will also effectively extend to such parties the right to many employee benefits that have been exclusively provided to heterosexual couples. While some plans may have already allow for the equivalent treatment of opposite sex and same-sex couples, many plans will need to be reviewed and amended to accommodate the transformed national landscape.

Obergefell validates same–sex marriage nationwide

In Obergefell v. Hodges, a 5-4 majority of the U.S. Supreme Court ruled that states are prohibited under the 14th Amendment from refusing to either license same-sex marriages or recognize such unions performed in other states. While based on fundamental rights of individual liberty and equality under the 14th Amendment, Obergefell also recognized the more material benefits of marriage that have been bestowed by the states and federal government.

Among the benefits most supported and underwritten by the state have been retirement and welfare benefits. However, the inconsistency in the law with regard to the recognition of same-sex marriage (as well as domestic partnerships) has been an administrative problem for employers operating in multiple states. Thus, while controversial for its social ramifications, Obergefell has been embraced by employer groups as allowing for uniformity in benefits administration. Stressing the importance of uniform employee benefit rules and policies, the ERISA Industry Committee (ERIC), noted that Obergefell“helps our industry with that federally needed consistency.” However, implementing that uniformity will be the responsibility of employee benefit plan sponsors and administrators. This burden will weigh most heavily on employers maintaining plans in states that have refused to license or recognize same-sex marriage.

The Obergefell decision will affect a wide variety of employee benefits, especially as to the tax implications (withholding and reporting) of such benefits. Focusing on the effect of the decision on retirement benefits under qualified plans and Social Security benefits, guidance from the IRS and SSA following another significant Supreme Court case in the area of same-sex benefits may prove instructive in navigating the future.

Windsor allowed for partial recognition of same-sex marriage

Under of the Defense of Marriage Act (DOMA), the term “spouse,” for purposes of federal law and regulations was limited to “a person of the opposite sex who is a husband or wife.” The rule effectively denied spousal benefits and rights available to heterosexual couples (e.g., qualified joint and survivor annuity and qualified pre-retirement survivor annuity rules) to same-sex couples. In 2013, however, the United States Supreme Court ruled that Sec. 3 of DOMA, as applied to persons of the same-sex who had been legally married under state law, was a violation of their right to equal protection under the Fifth Amendment (United States v. Windsor, US Sup Ct (2013).Significantly, the Court’s decision was restricted to same-sex marriages that were legally performed in a state. The decision did not require states that had not recognized same-sex marriage to do so. Nor did the decision nullify Sec. 2 of DOMA, which allows states to withhold recognition of same-sex marriage performed in other states.

Accordingly, after Windsor, it was assumed, but not certain, that same-sex couples who have been legally married would be entitled to employee benefits, such as survivor benefits. The IRS subsequently provided confirmation, stating that, effective September 16, 2013, it would treat same-sex couples who had been legally married in jurisdictions (including foreign countries) that recognize the marriage, as married for federal tax purposes (Rev. Rul. 2013-17). Notably, the IRS, under this policy, treats such couples as married even if they live in a jurisdiction that does not recognize same-sex marriage. Similarly, the Department of Labor, in implementing and enforcing the rules under ERISA, treats same-sex individuals who are legally married under state law as married spouses, even if they are domiciled in a state that does not recognize such marriages (ERISA Technical Release 2013-04).

Obergefell effectively negates the need for the “state of celebration” rule. As same-sex marriage must be recognized in all states, employers need only ensure that they are treating their employees equally, regardless of the state in which they were married or reside. Thus, while Obergefell does not compel employers to offer benefits to any employees, plans providing spousal benefits must treat employees equally regardless of their sexual orientation.
Wide range of spousal benefits now available to same-sex spouses

The benefits afforded under federal tax law to spouses (now including same-sex spouses) are numerous. These benefits have been available to same-sex couples who have been legally married. Thus, while plans that have incorporated the post-Windsor guidance may not need to be amended, the number of employees now potentially able to take advantage of the benefits will expand. However, note that these benefits are generally not available to domestic partnerships.

Domestic relations orders. Same-sex spouses (including former same-sex spouses) are entitled as alternate payees to benefits under a qualified domestic relations order. As alternate payees, the same-sex spouse would be empowered to receive or assign all or a portion of the benefits payable with respect to a plan participant.

Plan loans. In the event the plan is subject to survivor annuity requirements and a participant’s account balance is pledged as security for a loan, spousal consent for the loan must be obtained. Thus, the consent of same-sex spouses will be required for a participant loan if the couple has been legally married.

Required minimum distributions: determination of amount. In the event that an employee’s sole beneficiary is his or her spouse (and the spouse is no more than 10 years younger than the employee), in determining required minimum distributions during the employee’s lifetime, the applicable distribution period will be the longer of (a) the distribution period determined under the Uniform Lifetime Table or (b) the joint life and last survivor expectancy of the employee and the spouse (based on the Joint and Last Survivor Table set forth at Reg. §1.401(a)(9)-9, A-3 using the attained ages of the employee and the spouse as of their birthdays in the distribution calendar year. A participant’s same-sex spouse is now similarly eligible for the delayed commencement of benefits.

Required minimum distributions: Death of participant after distribution has begun. In the event that a participant dies after the distribution of his or her interest has begun, the remaining portion of that interest must be distributed at least as rapidly as under the method of distribution being used on the participant’s date of death. In applying this rule, the distribution of a participant’s interest is considered to begin on the required beginning date, even if the payments have actually begun before that date.

In the event the participant has a designated beneficiary as of September 30 of the calendar year following the calendar year of death, the distribution period is the longer of the remaining life expectancy of the designated beneficiary or the remaining life expectancy of the participant. The remaining life expectancy of the designated beneficiary is based on the single life table. However, the method by which the remaining life expectancy of the designated beneficiary is determined is a function of whether the sole beneficiary is the surviving spouse of the employee.

Nonspousal beneficiary. The distribution period measured by the remaining life expectancy of the beneficiary is determined by using the beneficiary’s age as of the beneficiary’s birthday in the calendar year immediately following the calendar year of the participant’s death. In subsequent years, the distribution period is reduced by one for each year that has elapsed since the year of the participant’s death.

Spousal beneficiary. If the participant’s spouse is the sole beneficiary, the applicable distribution period is measured by the surviving spouse’s life expectancy, using the spouse’s birthday for each distribution calendar year after the calendar year of the employee’s death up through the calendar year of the spouse’s death. Thus, the spouse’s life expectancy is recalculated each year based on the spouse’s birthday for the year in which a minimum distribution is required. Upon the spouse’s death, distributions will be made over a period that is equal to the life expectancy of the spouse, using the age of the spouse on his or her birthday in the calendar year of death, reduced by one for each calendar year that has elapsed after the calendar year of the spouse’s death.

Rollover to inherited IRA. The surviving spouse of a plan participant may roll over an inherited
401(k) account into a plan or IRA, without tax penalty, as if the spouse were the participant or owner. Under such circumstances, required minimum distributions would not be required to begin until the surviving spouse attains age 70 and 1/2.

The option to delay required minimum distributions by rolling over inherited assets from a 401(k) plan to an IRA via a trustee-to-trustee transfer has been available to nonspousal beneficiaries. However, restrictions apply. For example, the IRA must have been established in the plan participant’s name, payable to the nonspousal beneficiary. The IRA will be treated an inherited IRA of the nonspousal beneficiary and the beneficiary may not transfer the inherited amounts to his or her own IRA.

In addition, distributions from the inherited IRA must be made in accordance with required minimum distribution rules applicable to nonspousal beneficiaries where the participant dies before the entire interest has been distributed.

Required minimum distributions: Life expectancy determination. In the event an employee dies before distributions have begun, the applicable distribution period for distribution calendar years after the distribution calendar year containing the employee’s date of death, for purposes of the life expectancy rule, varies with respect to nonspousal and spousal designated beneficiaries. The life expectancy of the nonspousal designated beneficiary is determined under the single life table using the beneficiary’s age as of the beneficiary’s birthday in the calendar year immediately following the calendar year of the employee’s death.

By contrast, if the surviving spouse is the employee’s sole beneficiary, the applicable distribution period is to be measured by the surviving spouse’s life expectancy using the surviving spouse’s birthday for each distribution calendar year after the calendar year of the spouse’s death. In calendar years after the calendar year of the spouse’s death, the applicable distribution period will be the life expectancy of the spouse, using the age of the spouse as of the spouse’s birthday in the calendar year of the spouse’s death, reduced by one for each calendar year that has elapsed after the calendar year of the spouse’s death.

Hardship distributions. Hardship distributions authorized for medical, tuition, and funeral expenses incurred by a participant’s spouse will now be available to same-sex spouses throughout the country. Thus, a plan may make a hardship distribution to a participant to pay for the medical expenses of the same-sex spouse.

Conclusion

Obergefell is less an agent of social change than a recognition by the Supreme Court of a transformation that has already occurred in the way Americans view same-sex marriage. To a large extent, employers have been in the vanguard of validating same–sex unions by extending employee benefits, despite considerable administrative issues, to employees regardless of their sexual orientation and official marital status. Obergefell will allow for a continuation and expansion of such employee benefit practices, while affording plan sponsors and administrators much needed administrative simplicity.

Source: Obergefell v. Hodges (U.S. Sup Ct).

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