This past June, the United States Supreme Court held in Obergefell v. Hodges, 576 U.S. ___, 135 S.Ct. 2584 (2015), that the Fourteenth
Amendment (i) requires a state’s civil marriage laws to apply to same-sex couples on the same terms and conditions as opposite-sex couples and (ii)
prohibits a state from refusing to recognize a lawful same-sex marriage performed in another state on the ground of its same-sex character. Earlier this
Notice 2015-86 (the 2015 Notice), the Internal Revenue Service (IRS) issued guidance on
the application of Obergefell to certain employee benefit plans.
Section 3 of the Defense of Marriage Act prohibited recognition of same-sex spouses for purposes of federal tax law. In United States v. Windsor,
570 U.S. ___, 133 S.Ct. 2675 (2013), the Supreme Court held that Section 3 was unconstitutional. As a result, same-sex marriages were recognized for
federal tax-law purposes as of the date of that decision, June 26, 2013. Following Windsor, the IRS provided various forms of guidance as to the
impact of that decision on benefit plans and federal employment taxes. That guidance included Notice 2014-19, which explained how Windsor
applied to qualified retirement plans.*
The IRS indicates in the 2015 Notice that in light of Windsor and the guidance issued thereafter, it does not anticipate any significant impact from Obergefell on the application of federal tax law to employee benefit plans. However, in a series of questions and answers in the 2015 Notice, the
IRS does address certain issues relating to the amendment or administration of plans in response to Obergefell.
Qualified Retirement Plan Guidance Post-Obergefell
The 2015 Notice deals with the following matters involving qualified plans:
- Mandatory Amendments
- The 2015 Notice states that the sponsor of a qualified plan is not required to make additional changes as a result of
Obergefell. Qualified plans
had to be amended to reflect the Windsor holding and Notice 2014-19 by December 31, 2014 (or possibly later for governmental plans). Thus, under
Windsor and Notice 2014-19, any plan amendments required to recognize same-sex spouses and their marriages as to the qualification requirements
under Section 401(a) of the Internal Revenue Code of 1986 (the Code) were already required to be adopted and effective (subject to a possible delayed
amendment deadline for governmental plans) before Obergefell.
- Discretionary Amendments
- In response to Windsor, some plan sponsors may have amended their qualified plans to provide new rights or benefits as to participants with same-sex
spouses in order to make up for benefits or benefit options that had not previously been available to those participants. Following
plan sponsors might similarly decide to make discretionary plan amendments to provide new rights or benefits as to participants with same-sex spouses. The
2015 Notice indicates that plan sponsors are permitted to make such amendments, which must comply with the applicable qualification requirements, such as
the prohibition in Code Section 401(a)(4) of discrimination in favor of highly compensated employees as to contributions or benefits.
- Such an amendment might apply the effects of Windsor prior to June 26, 2013. The 2015 Notice provides that doing so would not cause the plan to lose
its qualified status, provided the amendment otherwise complies with Notice 2014-19.
- Under Code Section 436(c), a discretionary amendment to a single-employer defined benefit plan that increases the liabilities of the plan cannot take
effect unless (i) the plan’s “adjusted funding target attainment percentage” is sufficient or (ii) the plan sponsor makes the additional contribution
specified under Section 436(c)(2). The IRS states in the 2015 Notice that because an amendment that extends rights and benefits to a same-sex spouse in
response to Obergefell or the 2015 Notice would be a discretionary expansion of coverage, the requirements of Section 436(c) would apply.
- Finally, the IRS advises that a discretionary amendment made pursuant to the 2015 Notice must generally be adopted by the end of the plan year in which the
amendment is operationally effective, subject to special rules for governmental plans. Accordingly, to the extent that any such discretionary amendment was
implemented in 2015, that amendment should be adopted by December 31, 2015.
Health and Welfare Plan Guidance Post-Obergefell
The 2015 Notice addresses the following matters involving health and welfare plans:
- Mandatory Amendments
- The IRS states in the 2015 Notice that federal tax law generally does not require health and welfare plans to offer any specific rights or benefits to the
spouse of a participant. To the extent that a health or welfare plan does offer benefits to the spouse of a participant, the federal tax treatment of the
benefits that are provided to a same-sex spouse was already addressed in previous post-Windsor guidance, i.e., Revenue Ruling 2013-17 and Notice
2014-1. Accordingly, no changes to the terms of a health or welfare plan are required due to
Obergefell. The 2015 Notice does not
specifically require inclusion of same-sex spouses, even where coverage is provided to opposite-sex spouses. However, as we have noted in a previous
article, and as the IRS has stated in informal guidance, if spousal coverage is provided under a plan, failure to provide coverage to all legally married spouses
is likely to raise charges of discrimination.
- However, changes in state law as a consequence of 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. In the 2015 Notice, the IRS gives the example of a
health or welfare plan providing that coverage is offered to the spouse of a participant, as defined under applicable state law. If 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. Plan documents should be reviewed to ensure that the language reflects
the current requirements.
- Cafeteria Plans
- The 2015 Notice discusses changes to participant elections under a Code Section 125 cafeteria plan that during the plan year is amended to permit coverage
of same-sex spouses. The following guidance is provided:
- If the terms of the plan allow (or are amended to allow) a participant to make a change in coverage due to a significant improvement in coverage during
the coverage period under an existing coverage option, then the participant may revoke an existing election and make a new election as permitted under the
cafeteria plan regulations.
- If the eligibility criteria for a qualified benefit offered under a cafeteria plan change during a plan year to add eligibility for same-sex spouses,
this change constitutes a significant improvement in coverage under an existing coverage option for purposes of those regulations. Such a change in
eligibility criteria could occur, for example, as a result of an amendment to the terms of the plan; a change in applicable state law (to the extent the
terms of the plan refer to state law); or a change in the interpretation of the existing terms of the plan.
- If a cafeteria plan allows participants to make a change in election due to a significant improvement in coverage under an existing coverage option, it
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 period of coverage for any reason, including but not limited to those listed above. 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 can amend the plan to allow such an election. In the case of a change in the terms or operation
of the plan to permit coverage of same-sex spouses, such an amendment must be adopted no later than the last day of the plan year that includes 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. Therefore, to the extent that same-sex spouses became eligible for coverage under
a plan during 2015 (or earlier), the formal amendments should be adopted by December 31, 2015.
For further information, please contact either of the authors of this
article, Larry R. Goldstein and Sally Doubet King, or any other member of the
McGuireWoods employee benefits team.
*The other post-Windsor guidance was Revenue Ruling 2013-17 (which included the adoption of a general rule, for federal tax purposes, that
recognizes the validity of a marriage of a same-sex couple that was validly entered into in a state whose laws authorize the marriage of two
individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of such marriages); Notice
2013-61(applying Windsor and Revenue Ruling 2013-17 to employment taxes); and Notice 2014-1 (applying Windsor and Revenue Ruling
2013-17 to elections and reimbursements for same-sex spouses under cafeteria plans, flexible spending arrangements and health savings accounts).