Will same-sex spouses get the gift of additional retirement benefits this holiday season?

Earlier this week, the IRS released guidance discussing how the Supreme Court’s Obergefell decision, legalizing same-sex marriage across the country, could affect retirement plan documents and administration. Since most retirement plans are regulated under federal law and federal agencies, mainly the IRS and Department of Labor, many of the changes surrounding retirement benefits of same-sex spouses were previously implemented under the previous year’s Windsor Supreme Court decision. The Windsor decision required that same-sex marriages considered to be legal in the state in which they were performed, be recognized for federal purposes. However, following the Windsor decision, state law continued to dictate whether a same-sex couple could be legally married within each state. Obergefell has changed that, and removed states’ ability to outlaw same-sex marriages. There are a few potential changes to the retirement plans themselves, and to how those plans are practically administered that employers and plan sponsors should be aware of.

Plan documents were required to be amended last year following the Windsor decision, if necessary, to recognize the same-sex spouse of a participant from the date of the decision forward, in order to remain a qualified plan. However, the IRS’s recent guidance additionally provided that plan sponsors can choose to extend that recognition, and the resulting benefits to spouses, retroactively to before the date of the Windsor decision. Additionally, plan sponsors should also be aware of the practical considerations of same-sex marriages which were not recognized under state law prior to the Obergefell decision, or the occurrence of more same-sex marriages now that same-sex marriage has been legalized. This simply means that plan administrators should take care in ensuring they are capturing all married participants correctly.

In its recent guidance, the IRS discussed that plan sponsors could also choose to amend their plans to allow participants who have already commenced a single-life annuity distribution from their retirement plans to now change their election to instead receive a qualified joint and survivor annuity. In essence, this allows retirement plans to make up for benefits or benefit options that were not previously available to these participants. While some plan sponsors may have already made this change after the Windsor decision, they may also choose to make this change now. However, plan sponsors of single-employer defined benefit plans should consider the practical implications of making such amendments. A single-employer defined benefit plan will be subject to rules which require that, where an amendment to such a plan increases its liability, the amendment cannot take effect unless the plan meets funding targets. This could mean that the employer would be required to make significant contributions to the plan in order to meet those targets.

Finally, plan sponsors should be sure to educate their participants as to the effect of the Obergefell decision on their beneficiary designations. For example, if a participant with a same-sex spouse made a beneficiary designation to someone other than his or her spouse, now, post-Obergefell, the spouse will be required to give their consent in order for that beneficiary designation to remain completely valid. Without such consent, in the event of the Participant’s death, the spouse would automatically be entitled to a portion of the retirement account, regardless of the beneficiary designation.

While most of these changes do not affect plan documents, plan sponsors who wish to amend their plans have until December 31 to submit such amendments, if they wish for the amendment to apply to the 2015 year.