By Cheryl L. Morgan, ERPA, CPC, QPA, AIFA®
The talk of same-sex marriage becoming legal in the land of Lincoln makes Illinois the 15th or 16th state to allow for marriage equality. There is some degree of confusion over whether Illinois is the 15th or 16th state to get on this bandwagon because of the Rainbow State of Hawaii taking steps towards marriage equality at the same time as the state of Illinois.
Other talk on the subject of same-sex marriage involves the Supreme Court’s ruling on June 26, 2013 to strike down Section 3 of the Defense of Marriage Act (DOMA) as being ‘unconstitutional.’ This ruling made it clear that federal law cannot ban couples in same-sex marriages from receiving the same economic, tax, and employee ‘benefits’ as other legally married couples.
The Far Reaching Impact of this DOMA Ruling
How are businesses affected by this Federal DOMA ruling?
An employer does not have to have their business entity located in a state that permits same-sex marriage to be impacted by this Federal DOMA ruling. Nor can a retirement plan service provider in any state ignore this Federal DOMA ruling in their business operations.
Basically, any same-sex couple that went through the legal marriage process in one of the United States where they can be wedded would be able to claim marital status on any retirement plan paperwork (no matter where they currently reside), in the same manner as straight couples in traditional marriages.
What areas of retirement plan practice are impacted by this Federal DOMA ruling?
This Federal DOMA ruling has an impact on plan distributions, participant loans, beneficiary designations, QDROs, QJSA and QPSA rights, and the ‘attribution rules’ to determine business ownership; that can impact Highly Compensated Employee (HCE) and Key Employee status in plan compliance testing. In other words, there are certain rules and responsibilities that come with "equal rights.
Do we have to wait for changes in IRS or DOL regulations before changes occur in retirement plan practices?
No. In most retirement plan documents, ‘spouse’ is not specifically defined. Nor do most plan documents typically include language about the ‘Defense of Marriage Act (DOMA)’ blocking marital rights for people in same-sex marriages. This means we would not even have to amend the Plan documents (in most cases) to redefine the meaning of marriage.
Do we need to ask for additional documentation as evidence of same-sex couples being legally married?
No. Historically, we have trusted the marital status information provided by plan participants and that same level of trust should be extended to same-sex couples.
Are same-sex couples with domestic partner status covered under this expanded definition of "marriage?”
No, same-sex couples who may have previously filed paperwork to become domestic partners would have to get legally married in a State where it is permissible to go through the legal marriage process. Likewise for straight people who are currently registered as domestic partners. For those who think domestic partnerships are only a gay thing, in San Francisco, CA, there have been domestic partner filings by both gay and straight couples (for quite some time now).
The Supreme Court’s ruling to strike down Section 3 of the Defense of Marriage Act (DOMA) as being ‘unconstitutional’ has a definite impact on all types of retirement plan distributions:
- QDROs can be filed by same-sex spouses and there can be retroactive marriage benefits if/when the date of marriage precedes the date of the Supreme Court’s DOMA ruling.
- QDROs for spousal alternate payees provide for the option to rollover QDRO benefits to an IRA or to another qualified plan, to defer taxation.
- Required Minimum Distribution (RMD) calculations under IRC §401(a)(9) provide for a joint-life exception to the general single-life annuity rule. In order to utilize this joint-life exception for married participants, the spouse must be the sole beneficiary, and there must be a more than 10-year difference between the participant’s age and the age of the spouse.
- Spousal advantages relating to the required minimum distribution rules that apply in the event of a participant’s death before the participant would have been age 70-1/2. This can be advantageous for spousal beneficiaries when the timing of a deceased participant’s attainment of age 70-1/2 would have surpassed the timing of the start date for the 1-year life expectancy rule and/or the end date for the 5-year lump sum rule (pursuant to the regulations under §401(a)(9)).
- Safe harbor hardship conditions permit withdrawals to pay hardship expenses of certain family members, including spouses. This logic applies to medical expenses, educational expenses, and funeral expenses of a spouse.
- Severance distributions from plans with QJSA provisions require ‘spousal consent’ when the total vested benefit amount exceeds the QJSA threshold defined in the Plan document.
- By law, the QJSA threshold is intended to apply to vested benefits totaling to more than $5,000 (and this QJSA threshold has not changed in recent years). However, there was a certain degree of confusion when the automatic rollover regulations changed the cash out threshold from being applicable to distributions of vested benefits totaling o $5,000, or less down to $1,000, or less. Therefore, I have heard that a few plan document sponsors decided to offer an option to provide for a more liberal threshold for the QJSA provisions to apply to vested benefits totaling to more than $1,000.
- Spousal consent rights are now extended to same-sex spouses for Qualified Joint & Survivor (QJSA) benefits and Qualified Pre-Retirement Survivor Annuity (QPSA) benefits.
- While the aging of America has already increased the number of death benefit payments to plan participant’s beneficiaries in recent years, it is important to understand that the processing of death benefit distributions should not be taken lightly or thought of as ‘easy’ because there can actually be lawsuits against the plan and the plan sponsor if death benefits are paid out to the ‘wrong’ beneficiaries.
There are several layers of rules that can affect the question of "who is the plan participant’s beneficiary?"
- Default beneficiary provisions are found in every plan document, to be relied upon if there is no beneficiary designation at the time of a participant’s death. First rights are usually granted to the participant’s spouse, then children. These default beneficiary rights are now extended to same-sex spouses. This impacts death benefit entitlements in retirement plans and shifts the status of same-sex spouses to be considered as having a spousal beneficiary’s rights to plan benefits in the event of the death of their participant spouse.
- Same-sex spouses are no longer considered as non-spouse beneficiaries who were previously treated under the inherited IRA rules in the event of the death of their same-sex spouses – to be considered instead as spousal beneficiaries with spousal privileges that permit rollover IRAs to be established in their own names with death benefit proceeds.
- Even when there is a properly executed Beneficiary Designation form that does not always guarantee that you can rely on it to settle the question of who is the right beneficiary. For example, if the employer or any of its employees has knowledge of a participant being ‘married,’ say for health insurance purposes, then even an innocent enough Beneficiary Designation of the participant’s children could violate the spousal rights under a plan with QJSA provisions or a plan adhering to the conditions for a QJSA exemption. In other words, this Beneficiary Designation may not be legitimate unless the ‘spouse’ had consented (with a witness by a notary public or plan representative) to the Beneficiary Designation naming children of the participant as the primary beneficiary. In fact, there are some Plan documents that say that marriage or divorce nullifies a previous beneficiary designation made by the plan participant.
- There are ‘spousal rights’ to a married participant’s vested death benefits that can only be eliminated if there is an alternative Beneficiary Designation form with spousal consent (in writing, signed by the participant’s spouse with a witness endorsement by a notary public or a plan representative). Do you know what percentage of plan benefits are affected by spousal death benefit rights.
- In a DC Plan without QJSA provisions, it is a requirement of the QJSA exemption to ensure that spousal beneficiaries have first rights to 100% of the participant’s death benefit proceeds – unless there is an alternative beneficiary designation form with spousal consent (in writing, signed by the participant’s spouse with a witness endorsement by a notary public or a plan representative).
- In a plan with QJSA provisions, the percentage of the spousal beneficiary’s death benefit entitlement depends upon the QJSA percentage specified in the plan. The ‘standard QJSA’ required by law is a 50% QJSA. This means that a participant in a 50% QJSA plan does not need spousal consent to make a beneficiary designation that provides for the Primary beneficiary to be the Spouse @ 50%, providing the other 50% to Children or another party. However, spousal consent would be needed to take away the spousal rights to the first 50% of death benefit proceeds.
- There are a few QJSA plans that provide for a more generous QJSA than the 50% QJSA required by law. This can result in spousal beneficiaries having first rights to a greater death benefit percentage than 50%. The QJSA percentages that might otherwise apply include: 66-2/3%, 75%, or 100%.
- Does the Qualified Optional Survivor Annuity (QOSA) percentage impact the determination of spousal beneficiary rights? No. The QOSA rules were not intended to up the stakes on the standard 50% QJSA percentage. Rather, the QOSA rules were meant to provide another optional form of benefit and expand the list of distribution options offered at the time of a participant’s benefit distribution.
In a sense, the easiest death benefit to process is one where the plan participant is married and there is a recent Beneficiary Designation form that shows the Spouse as the 100% beneficiary of the entire death benefit.
Why would this scenario be considered more straightforward than other beneficiary arrangements?
- There are no potential conflicts with rules for spousal rights to death benefits when a married participant names their spouse as the exclusive beneficiary of their death benefit proceeds.
- There are no potential conflicts with rules for default beneficiary provisions when a married participant names their spouse as the exclusive beneficiary of their death benefit proceeds.
- The plan fiduciaries should not be worried about acting on the validity of the Beneficiary Designation naming the spouse as 100% beneficiary.
Practice Tip: Now is a good time to encourage employers to get updated beneficiary designation forms signed by all plan participants since marital status may have changed for a number of plan participants, either due to weddings or due to divorces. Also, children or grandchildren may be added to a beneficiary designation.
Timing of this legislative change
While practitioners and retirement plan sponsors must think in terms of June 13, 2013 forward for working with employers to change employee communications and messaging about marital status, there are actually retroactive implications that could affect some same-sex spouses. This potential for a retroactive impact is due to the fact that Section 3 of DOMA was declared ‘unconstitutional,’ not just as of June 13, 2013, but for all time.
The fact that same-sex marriage are being rolled out on a state by state basis means that these marriages could have taken place further back in time in some states. Of the 15 or 16 states adopting marriage equality, the first of these State-law changes were made on May 17, 2004, when the state of Massachusetts legalized gay marriage.
Therefore, the ‘unconstitutional’ declaration made by the Supreme Court against ‘benefits inequality’ means that gay couples who were legally married between May 17, 2004 and the June 13, 2013 date of the Supreme Court’s DOMA ruling could make retroactive claims for marital benefits.