Impact on Retirement Plans of Supreme Court Ruling on DOMA

Source: Peter Alwardt¸ Partner¸ EisnerAmper LLP¸ 23rd July 2013

The Supreme Court¸ in U.S. v. Windsor¸ ruled on June 26¸ 2013 that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional.  Section 3 of DOMA provided that only persons of the opposite sex could be recognized as “spouses” for purposes of federal law and that a “marriage” could only be between opposite-sex partners. In a recent Alert¸ we discussed the ruling’s impact on employers and employees; now let’s take a look at retirement plans.

Under this ruling¸ qualified retirement plans (401(k) plans¸ profit-sharing plans¸ money purchase plans¸ defined benefit plans¸ cash balance plans¸ and ESOPs) and 403(b) plans must now treat the relationship of same?sex married couples as a marriage and each party to that marriage as a spouse in order to maintain the plans’ tax?qualified status (see ‘Open Issues’ below for a discussion of issues in determining who is married). As a result of the Windsor decision¸ federal laws no longer restrict the terms “spouse” and “marriage” to opposite?sex relationships. Thus¸ federal law is now silent as to the parties to a marriage. A critical area of future controversy will involve employees who were married to same?sex partners in states that permitted such marriages¸ but who now reside in states where such marriages are not recognized.

Specific Areas Impacted by the Ruling

Qualified Joint and Survivor Annuities (QJSAs).  Married participants in defined benefit plans¸ cash balance plans¸ and some defined contributions plans must receive their benefits paid from the plan in the form of a QJSA under which the participant receives periodic annuity payments while living and the surviving spouse receives a percentage of those payments after the employee’s death¸ unless the spouse has affirmatively waived their right to the QJSA. As a result of the ruling¸ federally recognized same-sex spouses will be protected by the QJSA requirement and an employee will have to obtain his or her same-sex spouse’s consent in order to be able to elect an alternate form of benefit.

Qualified Pre-Retirement Survivor Annuities (QPSAs).  If a plan participant dies prior to retirement¸ defined benefit plans¸ cash balance plans¸ and some defined contribution plans are required to provide a survivor annuity to a participant’s spouse unless that form of death benefit has been waived by the spouse. These plans (even those not subject to the QPSA requirement) require spousal consent to name a non-spousal beneficiary¸ if that beneficiary is to receive 50% or more of the benefit. A same?sex spouse will now be automatically entitled to a death benefit upon the employee’s death unless they waive their right to the benefit.

Eligible Rollover Distributions. Only a spouse of a deceased participant is permitted to rollover the participant’s benefits to the spouse’s own IRA or to another qualified plan.  A non-spouse beneficiary can only rollover a participant’s benefits to an inherited IRA. A same-sex