Plan Sponsor Council of America. DOMA Revisited: What is the Impact on Re>rement Plans? February 11, 2014

Transcription

1 Plan Sponsor Council of America DOMA Revisited: What is the Impact on Re>rement Plans? February 11, 2014

2 Presenters: Ed Ferrigno Vice President, Washington Affairs, PSCA Richard P. McHugh Partner- in- Charge, Washington, D.C. Office Porter Wright Morris & Arthur, LLP 2

3 Today s Agenda 1. What are the ac>ons taken to date by the IRS and the DOL with regards to employer- sponsored plans following the Supreme Court s Windsor decision? 2. What are the likely next regulatory steps? Will this ruling force plan sponsors and plan providers to take retroac>ve ac>on? 3. How will the ruling and the resul>ng guidance affect re>rement and health care plans? How should plan sponsors proceed make an amendment to their plans, take a wait and see aytude and/or begin communica>ng the changes to their employees? 4. What will be the possible impacts of implementa>on from technology to human capital to comply with the new rules? 3

4 United States v. Windsor In the summer of 2013, the United States Supreme Court held in United States v. Windsor that the provisions in the Defense of Marriage Act ( DOMA ) excluding same- sex rela>onships from the defini>on of marriage and spouse for federal law purposes were uncons>tu>onal as a depriva>on of the liberty protected by the Fi_h Amendment of the Cons>tu>on of the United States. DOMA was signed into law in 1996 by then- President Bill Clinton. At issue was Sec>on 3 of DOMA, which states that the word marriage means only a legal union between one man and one woman as husband and wife, and also provides that the word spouse refers only to a person of an opposite sex who is a husband or a wife. 4

5 United States v. Windsor - cont d. DOMA also empowers states to refuse to recognize same- sex marriages permided in any other states Note this lader provision was not considered in the Windsor case, which should be important to states that do not recognize same sex marriage and thus may complicate plan administra>on. 5

6 United States v. Windsor - The Facts In Windsor, the plain>ff and her partner were residents of New York who got married in The plain>ff s partner died in 2009, and le_ her en>re estate to the plain>ff. The plain>ff therea_er sought to claim the federal estate tax exemp>on for surviving spouses. Relying on the defini>on of spouse found in DOMA, the IRS denied the availability of the exemp>on. A_er paying the resul>ng estate tax, the plain>ff sued for a refund and in doing so challenged the cons>tu>onality of DOMA. The plain>ff s mo>on for summary judgment was granted by the District Court and the Second Circuit Court of Appeals affirmed that decision. The Supreme Court agreed to hear the case, and ul>mately stuck down the provisions in ques>on. 6

7 Where Are We Now? 1. A_er Windsor, Sec>on 3 no longer applies to federal law (even though the decision does not impose a single defini>on of a valid same sex marriage). 2. States remain free to prohibit same sex marriage and free to withhold recogni>on of marriages performed in other states that permit same- sex marriage. Note that the broad language used in the majority opinion in Windsor threatens the ability of states to con>nue to prohibit same sex marriages (as can be seen in the recent decisions in Utah and Oklahoma and the pending cases in Virginia). 7

8 Where Are We Now?- Cont d 3. For re>rement plans covered by ERISA, benefits extended to spouses will have to be extended to same- sex spouses. 4. Employers are not required under ERISA to provide health care coverage for same- sex spouses (although other federal and state laws might apply to raise complica>ons). 5. Federal tax treatment related to the provision of employee benefits has been equalized (although varia>ons at the state level con>nue). 8

9 Guidance to Date Treasury /Internal Revenue Service 1. Revenue Ruling (plus accompanying FAQ s) IRS will determine a valid same- sex marriage under a state of celebra>on test (i.e., a marriage is valid if performed in a state, territory or country where same- sex marriage is permided regardless of place of domicile). Except for certain federal tax treatment issues (generally related to health care coverage), this ruling has prospec>ve applica>on only on and a_er September 16, Civil unions and registered domes>c partnerships are not recognized for federal tax purposes as marriages. IRS promises further guidance on retroac>vity for re>rement plans. 9

10 Guidance to Date - Cont d 2. No>ce This guidance provides federal tax guidance to taxpayers for making appropriate adjustments for benefits provided on a taxable basis that no longer are taxable. 3. No>ce The most recent guidance, this no>ce sets out rules rela>ng to coverage of same- sex spouses under cafeteria plans, flexible spending accounts and health savings accounts. 10

11 Guidance to Date - Cont d Department of Labor 1. Technical Release This release generally tracks the posi>on of the IRS in Rev. Rul , and applies a state of celebra>on standard for determining a valid same- sex marriage for areas of ERISA regulated by the DOL. 2. FMLA Guidance- - August, 2013 Perhaps somewhat surprisingly, the DOL clarified a Wage and Hour Division fact sheet to state that a valid same- sex marriage will be based on the state of residence and not on the state of celebra>on. 11

12 Future Guidance The biggest issue to be resolved yet by the IRS and the DOL relates to the possible retroac>ve applica>on of the Windsor and the impact of retroac>vity on employee benefit plans. Timing on any such guidance is uncertain. The PSCA, along with a number of other employee benefits associa>ons, sent a leder in December, 2013 to the IRS (with a copy to the DOL) strongly advising against the retroac>ve applica>on of the Windsor decision to re>rement plans. 12

13 Impact on Re>rement Plans The Windsor decision and the guidance issued therea_er by the IRS and the DOL affect the administra>on of re>rement plans in a number of ways since same- sex spouses must be afforded the same rights as opposite sex spouses. Areas that will be affected include the following: 1. Spousal survivor benefit For defined contribu>on plans (including profit sharing and 401(k) plans), this affects death benefits payable upon the death of a par>cipant. For defined benefit plans, this affects benefits payable in the form of a qualified joint and survivor annuity and benefits upon the death of a par>cipant in the form of a qualified pre- re>rement survivor annuity. 13

14 Impact on Re>rement Plans - Cont d. Areas of impact (con>nued ): 2. Designa>on of beneficiaries 3. Applica>on of QDRO s 4. Required Minimum Distribu>ons 5. Par>cipant loan programs (to the extent spousal consent rules apply) 6. Rollover Distribu>ons 7. Hardship Distribu>ons 14

15 Impact on Health And Welfare Plans As noted, employers are not required under ERISA to provide coverage to same- sex spouses (or indeed to any spouses) - although other laws (both federal and state) might complicate a decision to cover opposite sex spouses and not same- sex spouses. If coverage is provided, the areas that will be affected include the following: 1. Federal tax treatment for all spouses has been equalized so that coverage is provided on a tax- exempt basis. Note that coverage s>ll may be taxable under state law in states that do not permit or recognize same- sex marriage. 2. Tax favored coverage for same- sex spouses has been extended to coverage under a cafeteria plan, flexible spending accounts and health savings accounts. 15

16 Impact on Health And Welfare Plans - Cont d. Areas of impact (con>nued ): 3. COBRA health care con>nua>on rights must be extended to covered same- sex spouses. 4. The special mid- year enrollment rights under HIPAA must apply to same sex spouse who otherwise are en>tled to coverage under a health care plan. 16

17 What Should Employers Do - And When? 1. Payroll and HR systems will have to be reviewed to ensure they conform to the new federal tax equaliza>on rules. Payroll systems will have to be updated to handle any state differences in tax treatment for health care coverage. 2. Considera>on of plan amendments, generally including the defini>on of spouse in both re>rement and health care plans. Health care plans, par>cularly cafeteria plans, will have to consider the adop>on of other amendments related to opera>onal issues affec>ng same- sex spouses (such as mid- year elec>on changes related to marital status). 17

18 What Should Employers Do - And When? - Cont d. Here is a sample plan amendment provision rela>ng to the defini>on of spouse that may be considered by plan sponsors: Spouse shall mean any individual who is lawfully married to a Par>cipant under any State law, including individuals married to Par>cipants of the same sex who were legally married in a State that recognizes such marriages, but who are domiciled in a State that does not recognize such marriages. For purposes of the foregoing sentence, State shall mean any domes>c or foreign jurisdic>on having legal authority to sanc>on marriages. 18

19 What Should Employers Do - And When? - Cont d. 3. Employers should consider distribu>ng a communica>ons piece to their employees reviewing the new same- spouse rules and its implica>ons. 4. Employer should review and revise as necessary all plan administra>ve form and procedures (including administra>ve manuals) to ensure compliance with the same- sex spouse rules, and conduct training sessions for HR staff. 5. Employers should consider whether con>nua>on of domes>c partner health care coverage makes sense. 19

20 Impacts Of Implementa>on 1. From a health care standpoint, perhaps the most important and poten>ally most problema>c technology issue will be revising payroll and HR systems (both internal and external) to handle equalized tax treatment for same- sex spouses. In the category of nothing is easy, state law taxa>on differences obviously will complicate maders. 2. All administra>ve forms (whether hard copy or electronic) will have to be reviewed and revised as necessary along with the methods by which these forms are delivered. 20

21 Ques>ons? 21

22 Ed Ferrigno Richard P. McHugh

23 Ed Ferrigno Edward Ferrigno, Vice President, Washington Affairs, Plan Sponsor Council of America (PSCA) Ed Ferrigno is Vice President, Washington Affairs, for PSCA where he represents member s interests before the federal legisla>ve and regulatory community. Ed has extensive experience in human resources management and government rela>ons in both the corporate and associa>on environment. He is responsible for PSCA s successful effort to enact the EGTRRA pension reform legisla>on in 2001 and in warding off harmful legisla>on introduced in 2002 in response to the Enron and WorldCom scandals. He played a key role in cra_ing the pension community s responses to the mutual fund inves>ga>ons and subsequent SEC proposals concerning the processing of plan- related mutual fund trades and the development of a redemp>on fee rule. 23

24 Richard P. McHugh Richard P. McHugh is a partner in the law firm of Porter Wright Morris & Arthur LLP, and is Partner- in- Charge in the firm s Washington, D. C. office. Mr. McHugh is a graduate of Georgetown University (A.B., Economics) and of Georgetown University Law Center (J.D.). Mr. McHugh has over 30 years of experience as a specialist in all areas of employee benefits law, including qualified and non- qualified re>rement plans, ESOP s, execu>ve compensa>on and health and welfare benefit plans. Mr. McHugh advises companies throughout the United States, and increasingly the world, of varying sizes and in varying industries. He is a frequent lecturer before government, industry and professional groups on various employee benefit maders and is the published author of several ar>cles and publica>ons rela>ng to employee benefit maders. Mr. McHugh is a member of the Plan Sponsor Council of America, and a member of its Board of Directors and its Legal and Legisla>ve Commidee. Mr. McHugh is listed in the Best Lawyers in America in the area of Employee Benefits (ERISA) Law. 24