The DOMA Ruling and its Effects on 401(k) Plans
When the Supreme Court ruled on two cases related to same-sex marriage and ultimately ruled a key component of the Defense of Marriage Act as unconstitutional in June 2013, the effects proved momentous for many individuals close to the issue – but it also meant significant changes for businesses. According to the Supreme Court, the ruling has or will have some degree of impact on more than 1,000 federal laws, many of which will impact administration of benefit plans. In states where same-sex marriage is recognized, plan sponsors and participants may be required to take action now.
Generally speaking, many retirement plans such as a 401(k) provide certain benefits to spouses. An effect of the DOMA ruling is that the group of individuals classified as a spouse is expanded to include same-sex spouses living in states recognizing same-sex marriage. For businesses offering 401(k) plans, they will have to determine how this recent ruling impacts their retirement benefits offerings, and make administrative adjustments accordingly.
401(k) plan benefits that have been impacted due to the DOMA ruling include:
Death Benefits: 401(k) plans generally specify that a death benefit is payable to the surviving spouse unless that spouse consents to an alternate beneficiary. A same-sex spouse will be entitled to the same benefit. Guidance is still needed as to whether death benefits will be payable to a same-sex spouse who moves to or from a state where the marriage is not legally recognized.
Qualified Joint and Survivor Annuity (QJSA) and Qualified Pre-Retirement Survivor Annuity (QPSA): Currently, defined benefit plans (and defined contribution plans that offer survivor annuity options) must provide automatic survivor benefits to a spouse via QJSA (benefits paid after retirement) and a QPSA (benefits paid if the participant dies before entering retirement), unless the participant elects otherwise with the consent of his or her spouse. This legal order now extends to individuals in same-sex marriages.
Spousal Consent: The naming of a non-spouse beneficiary is not permitted unless the spouse waives this right. In addition, plans that provide for a QJSA require spousal consent prior to the participant receiving a loan from the plan. In both instances, this now includes same-sex spouses.
Qualified Domestic Relations Orders (QDROs): A QDRO is a legal order issued when there is a divorce or separation that splits plan ownership between two spouses or the participant and a child. QDROs issued in states that recognize same sex marriages are generally the same as those issued to opposite sex couples.
Hardship Distributions: Same-sex spouses can now be considered the primary beneficiary for hardship distributions. A hardship issued for certain expenses relating to a same-sex spouse is now covered in the same manner as an opposite-sex spouse.
At the time of this writing, IRS guidance is still pending on plan-related issues such as attribution of ownership (which would affect highly compensated employee status and controlled ownership) as well as plans that cover participants who are married to same-sex spouses in a state that recognized the marriage, but who subsequently moved to a state that does not recognize same-sex marriage. The issue of location could prove to be even more complicated for businesses if they operate in multiple states, Cara Woodson Welch, a vice president at WorldatWork, recently noted to the Wall Street Journal. Businesses offering 401(k) plans should stay up-to-date on any and all of these clarifications as they happen.