IRS Notice on Obergefell Includes Permitted Cafeteria Plan Election Change and Guidance on Qualified Retirement Plans

Practical Law Legal Update w-001-0459 (Approx. 7 pages)

IRS Notice on Obergefell Includes Permitted Cafeteria Plan Election Change and Guidance on Qualified Retirement Plans

by Practical Law Employee Benefits & Executive Compensation

Windsor and IRS Guidance

In US v. Windsor, the US Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional. Section 3 of DOMA had defined the terms "spouse" and "marriage" for federal law (including the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA)) as being solely between one man and one woman (see Legal Update, Supreme Court: DOMA Section 3 is Unconstitutional and Proposition 8 Proponents Lack Standing).

After Windsor, the IRS issued Revenue Ruling 2013-17, which adopted a general rule for federal income tax purposes, recognizing a same-sex marriage that is valid in the state where it was entered into, regardless of the married couple's place of domicile (see Legal Update, IRS Adopts Same-Sex Marriage Recognition Rule).

The IRS then applied Windsor and Revenue Ruling 2013-17 to:

Implications of the Obergefell Decision

On June 26, 2015, in Obergefell v. Hodges, the US Supreme Court ruled that:

Same-sex couples may exercise the right to marry in all states.
A state must recognize a lawful same-sex marriage performed in another state.

(See Legal Update, Supreme Court's Recognition of Same-Sex Marriage Raises Benefits and Employment Law Issues.)

Because same-sex marriages are already recognized for federal tax purposes under Windsor and the IRS' post-Windsor guidance, the IRS indicated in Notice 2015-86 that Obergefell should not have a significant impact on how federal tax law applies to employee benefit plans. The Q&As in Notice 2015-86 were issued because:

Some plans (and plan administration practices) may have been changed in response to Obergefell.
Plan sponsors have asked for clarification regarding how Obergefell applies to certain changes to plans (for example, a discretionary expansion of benefits).

Retirement Plans

Qualified retirement plans are not required to make any changes following Obergefell, because Notice 2014-19 required these plans to be amended to recognize same-sex spouses and their marriages following Windsor (see Same-Sex Marriage Developments for Retirement Plans Toolkit). However, plans may:

Make certain discretionary amendments providing new rights or benefits for plan participants with same-sex spouses to make up for benefits or benefit options that had not previously been available to those participants, such as providing participants who commenced a single life annuity distribution before June 26, 2013 (the date of the Windsor decision) with an opportunity to elect a qualified joint and survivor annuity (QJSA) form of distribution as of a new annuity starting date.
Still be retroactively amended to recognize same-sex marriages as of a date earlier than June 26, 2013 if the amendment otherwise complies with Q&A 3 of Notice 2014-19.

Notice 2015-86 clarifies that a discretionary amendment to a single-employer defined benefit plan that is intended to respond to Obergefell or Notice 2015-86 is subject to the requirements of Code Section 436(c) (to learn more about Code Section 436, see Practice Note, Benefit Restrictions under Code Section 436). A discretionary amendment could include providing new rights or benefits with respect to plan participants with same-sex spouses or amending the plan to recognize same-sex marriages as of a date earlier than June 26, 2013.

Deadline for Amendments

Sponsors of qualified retirement plans may adopt a plan amendment under Notice 2015-86 providing new rights or benefits for plan participants with same-sex spouses by the end of the plan year in which the amendment is operationally effective. Amendments to a qualified retirement plan that are contemplated by Notice 2015-86 are discretionary amendments, and not interim amendments within the meaning of Section 5.02 of Revenue Procedure 2007-44.

Health and Welfare Plans

Under Notice 2015-86, certain cafeteria plans may allow participants to revoke existing elections and submit new elections if:

The plan formerly did not permit coverage of same-sex spouses.
The plan terms (or operation) change during the plan year to permit coverage of same-sex spouses.

This rule applies if the cafeteria plan's terms allow (or are amended to allow) participants to change coverage due to a significant improvement in coverage during the coverage period under an existing coverage option (see Practice Note, Cafeteria Plans).

A change during the plan year in the eligibility criteria for a cafeteria plan qualified benefit to add eligibility for same-sex spouses is a significant improvement in coverage for this purpose. Such a change in eligibility criteria could result from a:

Plan amendment.
Change in applicable state law, if the plan terms reference the state law.
Change in the interpretation of the existing plan terms.

Under Notice 2015-86, cafeteria plans that permit election changes for significant improvements in coverage may allow participants to revoke an existing election and submit a new one if a same-sex spouse first becomes eligible for coverage under the plan terms during the year for any reason (including plan amendments, changes in applicable state law, or changes in plan interpretation).

A new election could include an election:

To add coverage for a same-sex spouse to a benefit option in which the participant is already enrolled.
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 change their elections due to significant improvements in coverage, the cafeteria plan may be amended at any time to permit participants to make such an election. Regarding the election change for same-sex spouses, however, this amendment:

Must be adopted by the last day of the plan year that includes the later of:
- the date that same-sex spouses first became eligible for plan coverage; or
- December 9, 2015.
May be retroactive to the date same-sex spouses first became eligible for plan coverage.

Regarding health and welfare plans generally, the IRS indicated in Notice 2015-86 that Obergefell did not require changes to the terms of health and welfare plans (because the federal tax treatment of benefits provided to same-sex spouses under these plans was already addressed in Revenue Ruling 2013-17 and Notice 2014-1). However, Obergefell could require changes in plan operation if the decision impacted the group of spouses who are eligible for plan coverage. For example, according to the IRS, if a health plan offered coverage to a participant's spouse as defined under state law, and the plan administrator determines that applicable state law was expanded after Obergefell to include same-sex spouses, then the plan terms would require coverage of same-sex spouses as of the date of the change in applicable state law.

For analysis of these issues, in the health and welfare plans context, see Article, Expert Q&A on Same-Sex Partner Benefits After the US Supreme Court's Obergefell Decision.

Practical Impact

Notice 2015-86 confirms that Obergefell does not require changes to the terms of qualified retirement plans, and health and welfare plans. However, for calendar-year cafeteria plans that do not allow election changes due to significant improvements in coverage, but now wish to do so by the applicable deadlines, this guidance is arriving fairly late in the year and doesn't allow much time for plan amendments and election changes.

IRS Notice on Obergefell Includes Permitted Cafeteria Plan Election Change and Guidance on Qualified Retirement Plans | Practical Law