Signed into law in 1996, the federal Defense of Marriage
Act (DOMA) is a small law that has caused big controversy.
Introduction and Background
DOMA is small in the sense that
it consists of only three sentences, making it shorter to include the full text
of the law here rather than attempting to explain it.
Section 1. Short Title
This Act may be cited as the
“Defense of Marriage Act.”
Section 2. Powers reserved to the
No State, territory, or
possession of the United States, or Indian tribe, shall be required to give
effect to any public act, record, or judicial proceeding of any other State,
territory, possession, or tribe respecting a relationship between persons of the
same sex that is treated as a marriage under the laws of such other State,
territory, possession, or tribe, or a right or claim arising from such
Section 3. Definition of Marriage
In determining the meaning of any
Act of Congress, or of any ruling, regulation, or interpretation of the various
administrative bureaus and agencies of the United States, the word 'marriage'
means only a legal union between one man and one woman as husband and wife, and
the word 'spouse' refers only to a person of the opposite sex who is a husband
or a wife.
In short, DOMA provided that for
all federal legal purposes, including operating a qualified retirement plan,
only marriages between men and women were considered valid. In other words,
marriages between same-sex couples were not recognized even if those marriages
were valid under certain state laws.
The Big Decision
Everything changed over the
summer with the United States Supreme Court's decision in United States v.
Windsor, which found Section 3 of DOMA to be unconstitutional. In a nutshell,
Windsor was required to pay a six-figure estate tax bill that she would not have
had to pay if her same-sex marriage was recognized for federal tax purposes. The
Court held that this violated the constitutional principle of equal protection.
Although Section 2, which allows
each state to determine whether it will recognize same-sex marriages performed
in other states, still stands, the Internal Revenue Service and Department of
Labor issued Revenue Ruling 2013-17 and Technical Release 2013-04, respectively,
to clarify that for retirement plan purposes, same-sex marriages are now
recognized as long as they were valid at the time in the state where performed.
This so-called “state of
celebration” rule means that employers in states that do not recognize same-sex
marriages must still treat same-sex couples as married with respect to their
company-sponsored retirement plans.
Practical Impact on Plan Operations
While many have considered the
recognition of same-sex marriage to be primarily a social issue, the Windsor
decision and subsequent agency guidance have a direct impact on the day-to-day
operations of qualified plans.
Highly Compensated and Key Employees
One of the foundations of
retirement plans is that they cannot discriminate in favor of highly compensated
employees (HCEs) and/or key employees, thus requiring the litany of annual
tests. One way in which a person can be an HCE or key employee is based on
ownership of the company sponsoring the plan.
While a detailed discussion is
beyond the scope of this article, there is a separate rule that says a spouse is
deemed to own what his or her spouse owns. In other words, if an employee owns
enough of an interest in the company (usually more than 5%) to be considered an
HCE or key employee, that employee's spouse will also be an HCE or key employee
due to the attributed ownership. Now that federal law recognizes same-sex
marriages, the attribution rules apply to such couples, causing spouses to be
classified as HCE or key when they would not have been in the past.
It is important to consider how
this shift may impact annual testing and plan design. For example, assume Mandy
and Mindy are married, and Mandy owns 100% of M & M Company. M & M sponsors a
401(k) plan and both Mandy and Mindy are eligible. Mindy has elected not to make
Prior to Windsor, the marriage
would not have been recognized, making Mindy a non-HCE and causing her 0%
deferral rate to have a negative impact on the ADP test. Now that the same-sex
marriage is recognized, Mindy is an HCE through spousal attribution, and her 0%
deferral rate improves the ADP test results.
This change in classification
could be sufficient to cause a previously failing plan to pass. Of course, the
opposite could also be true, so it is important to decide whether any plan
design changes are warranted. In addition to nondiscrimination testing, spousal
attribution may also impact whether or not two companies have enough overlapping
ownership to be part of the same controlled group.
Beneficiary Designations and Spousal Consent
If a plan participant is married,
the default beneficiary in the event of death is that participant's spouse. If a
single participant gets married, his or her new spouse automatically becomes
beneficiary, overriding any previous elections that had been made. In order for
the participant to designate someone else as beneficiary, the spouse must
consent in writing and that consent must be notarized.
With the newly-expanded
definition of spouse, it is important for participants to review their existing
designations to determine whether any changes are warranted. For a participant
who wishes to name a same-sex spouse as beneficiary, it is probably not as
important since the recognition of their marriage now makes the spouse the
automatic default beneficiary.
However, assume that same
participant had designated another person such as a child, parent or sibling as
beneficiary. The Windsor decision essentially invalidates that designation and
replaces it with the same-sex spouse. In order for the participant to
re-designate that person, his or her same-sex spouse must provide written and
In addition to beneficiary
designations, plans that include qualified joint and survivor annuity provisions
set an annuity as the default form of distribution. If a participant wishes to
elect a different form of benefit payment (such as a lump sum) or wants to take
a plan loan, the newly-recognized same-sex spouse must consent in writing.
Qualified Domestic Relations Orders (QDRO)
Anytime one has to deal with
marriage, there is the possibility of having to deal with divorce. And, divorce
in the retirement plan context often means QDROs. The expansion of recognized
marriage to include same-sex couples means that the same-sex spouse of a plan
participant is now able to seek a portion of the plan account via a QDRO if the
couple goes through a divorce.
Unfortunately, there are some
additional complications that arise. Although Windsor and the guidance from the
DOL and IRS make things easy from a federal perspective, marriage and divorce
are matters of state law. Keeping in mind that Section 2 of DOMA was not struck
down, state A is not required to recognize a same-sex marriage performed in
state B. That means that if a same-sex couple married in state B now lives in
state A and wants to get a divorce, A may not be willing and is not required to
grant that divorce.
If there is no valid divorce,
legal separation or other domestic relations matter, there cannot be a QDRO.
This could place plan sponsors in an uncomfortable position in determining
whether a court order awarding benefits is sufficient to allow for the payment.
Given the nuances involved and the interaction between state and federal law in
this area, it may be the prudent course of action to consult an attorney or seek
clarification from the court in determining how to proceed.
A Different Type of Discrimination
Usually, when thinking of
retirement plan issues, discrimination means failing an ADP test or something
like that. However, there are certain employment discrimination issues that can
arise in the context of same-sex marriage.
The day-to-day operational items
described above require plan sponsors to potentially collect information they
have not been required to collect in the past. At first blush, the easy solution
is to simply ask those who might be impacted. Unfortunately, singling out
certain classes of employees to provide additional personal information could
give rise to claims of employment discrimination. This is especially true in
locales where same-sex relationships may not be as accepted or could be subject
to some type of stigma.
Since same-sex couples have
pursued other types of legal relationships such as civil unions, employers might
be inclined to request a marriage certificate or other documentation to confirm
the couple is legally married. But again, requiring certain employees to provide
marriage certificates while not requiring the same documentation from
opposite-sex couples could be discriminatory.
The downfall of DOMA has levelled
the field in how married participants are treated for purposes of retirement
benefits; however, there are a number of items to be addressed, from plan design
to operational procedures. Although many of these are straightforward, working
through them with experienced and knowledgeable professionals will ensure a
thorough decision-making process and go a long way toward preventing unintended
or unanticipated outcomes.
IRS and Social Security Annual Limits
Each year the U.S. government
adjusts the limits for qualified plans and social security to reflect cost of
living adjustments and changes in the law. Many of these limits are based on the
“plan year.” The elective deferral and catch-up limits are always based on the
calendar year. Here are the 2014 limits as well as prior year limits for
Maximum compensation limit
Defined contribution plan maximum contribution
Defined benefit plan maximum benefit
401(k), 403(b) and 457 plan elective maximum elective deferrals
SIMPLE plan elective deferrals
"Highly Compensated" employee threshold
"Key Employee" (officer) threshold
Social security taxable wage base
This newsletter is intended to provide general
information on matters of interest in the area of qualified retirement plans and
is distributed with the understanding that the publisher and distributor are not
rendering legal, tax or other professional advice. Readers should not act or
rely on any information in this newsletter without first seeking the advice of
an independent tax advisor such as an attorney or CPA.