671 THE AMERICAN LAW INSTITUTE Continuing Legal Education Fundamentals of Employee Benefits Law May 15-16, 2014 Philadelphia, Pennsylvania Spousal Rights (Joint and Survivor Benefits, Pre-Retirement Survivor Benefits and Qualified Domestic Relations Orders) By Roberta Casper Watson The Wagner Law Group Boston, Massachusetts
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673 SPOUSAL RIGHTS (JOINT AND SURVIVOR BENEFITS, PRE-RETIREMENT SURVIVOR BENEFITS, AND QUALIFIED DOMESTIC RELATIONS ORDERS) By Roberta Casper Watson Wagner Law Group COPYRIGHT: (c) 2014 Roberta Casper Watson. All rights reserved. (Adapted from prior version of this outline by Pamela Perdue, used with permission.) I. Introduction As a result of the Retirement Equity Act of 1984 ( REA ), a plan participant's ability to determine the form and manner of payment of most benefits from a qualified plan subject to REA are not without restrictions. REA imposed restrictions and limitations designed to ensure that the non-participant spouse is aware of the benefits payable from the plan and, in most instances, is required to consent to the form of payment. Further, REA required that the non-participant spouse generally be the default beneficiary of the participant's interest in affected plans subject to the participant's ability to elect an alternate beneficiary with the non-participant spouse's consent. In addition, REA imposed, for the first time, federal rules allowing a divorcing non-participant spouse to obtain an interest in part or all of the participant's interest in a covered plan. Other legislation has directly or indirectly affected these REA provisions, including the Pension Protection Act of 2006 ( PPA ), Pub. L. No. 109-280 (2006) and in the past the Defense of Marriage Act ( DOMA ), Pub. L. No. 104-199 (1996) (affecting definition of spouse). On June 26, 2013, those provisions of DOMA have now been ruled unconstitutional in the case of United States v. Windsor, 133 S.Ct. 2675 (2013), so its definition of spouse will not control, but employers and plan administrators will need to be aware of applicable transition rules. 1
674 These REA spousal provisions are among those found in parallel provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the Internal Revenue Code of 1986 ( Code ). Other provisions in ERISA and the Code affect or have spousal rights elements, including the required minimum distribution provisions in Code Section 401(a)(9) and rollover rights in Code Section 402. Plan features involving non-spouse beneficiaries have been enhanced over the years, including rollover rights and 401(k) hardship distributions. II. Definition of Spouse REA did not include a definition of spouse, which has led to use of applicable state law to determine eligibility as a spouse. In a development after REA, DOMA provided that a spouse could not be a member of the same sex. Some plans chose to create REA-like spousal provisions for same sex domestic partners and those legally married under the laws of a few states, but, because of DOMA, these provisions had to be carefully drafted. In light of the Windsor case, same-sex spouses recognized as such under applicable state law will be recognized for all federal tax law purposes. A plan is not required to treat a same-sex spouse as a spouse prior to June 26, 2013. Effective as of September 16, 2013, Rev. Ruling 2013-17 provides that same sex spouses whose marriages are recognized by the state in which they are performed will be deemed to be validly married regardless of where they live. Rev. Ruling 2013-17 also provides that domestic partners and couples in a civil union, whether same sex or opposite sex, who have not entered into valid marriages, will not have spousal rights. IRS Notice 2014-19 addresses retroactive aspects of the change to the definition of spouse for purposes of these rules and also addresses the need for and timing of plan amendments, as follows: A. The operations of the plan must reflect the result of the Windsor case as of June 26, 2013. A plan will not fail to comply because it fails to recognize same sex spouses prior to that date. B. A plan may be amended to recognize same sex spouses prior to June 26, 2013, so long as proper attention is given to issues that are not easy to implement retroactively, such as ownership aggregation rules. If the amendment increases the plan s funding liabilities under Section 436(c) of the Code, appropriate adjustments must be made under Section 436(c)(2). 2
675 C. In operation, marriages must be recognized if valid where performed, effective as of September 16, 2013, and other formal relationships will not be treated as marriages from that date forward D. A plan need not be amended if its provisions are not inconsistent with the Windsor decision, Rev. Rul. 2013-17 and Notice 2014-19. However, a plan may be amended to be totally clear on the transition issues. E. A plan document that is inconsistent with the Windsor decision, Rev. Rul. 2013-17 or Notice 2014-19 must be amended. Any such plan amendment must be adopted by the later of December 31, 2014 or the end of its applicable remedial amendment period, and is exempt from Section 436(c). Government plans have until the end of the first legislative session after December 31, 2014. III. Qualified Joint and Survivor Annuity ("QJSA") Requirements and Qualified Pre-Retirement Survivor Annuity ("QPSA") Requirements A. What is a QJSA? A QJSA is an annuity for the life of the participant with a survivor annuity for the life of the spouse. The survivor annuity must not be less than 50% of, and not greater than 100% of, the amount of the annuity which is payable during the joint lives of the participant and the spouse and must be the actuarial equivalent to a single life annuity for the life of the participant. (Code Section 417(b) and ERISA Section 205(d).) In the case of an unmarried participant, a QJSA is an annuity for the life of a participant. (Treas. Reg. Section 1.401(a)-20, Q-25(a).) B. What is a QOSA? Like the QJSA, a QOSA is an annuity for the life of the participant with a survivor annuity for the life of the spouse. If the QJSA survivor annuity is less than 75%, the QOSA survivor annuity must be 75% of the amount of the annuity which is payable during the joint lives of the participant and the spouse and must be the actuarial equivalent to a single life annuity for the life of the participant. If the QJSA survivor annuity is 75% or more, the QOSA percentage is 50%. (Code Section 417(g) and ERISA Section 205(d).) C. What is a QPSA? 3