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IRS Issues New Guidance on Windsor’s Application to Tax Qualified Retirement Plans

On Behalf of | May 15, 2014 |

The IRS has issued additional guidance (i.e., Notice 2014-19) regarding the impact that the U.S. Supreme Court’s United States v. Windsor decision will have on tax-qualified retirement plans. In Windsor, the Court upheld a lower court’s determination that Section 3 of the Defense of Marriage Act (“DOMA”) is unconstitutional. Section 3 of DOMA defined “marriage,” for most federal purposes, as “a legal union between one man and one woman as husband and wife.” It goes on to state that “the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.”

Immediately following the Windsor decision, the IRS released guidance that confirmed married same-sex couples would be treated as married for federal tax purposes if the marriage took place in a jurisdiction that legally recognizes same-sex marriages, regardless of where the couple resides. (See Revenue Ruling 2013-17.) Notice 2014-19 focuses on retirement plans that are qualified under Section 401(a) of the Internal Revenue Code (the “Code”) and it provides guidance, in question and answer format, on the effective date and timing of plan amendments to implement Windsor.

Effective Date. As of June 26, 2013 (i.e., the date of the Windsor decision), qualified retirement plans must reflect the outcome of Windsor. Between June 26, 2013 and September 16, 2013, qualified plan sponsors may elect to recognize only the same-sex marriages of those participants who reside in states where same-sex marriage is recognized. Beginning September 16, 2013, qualified retirement plans must recognize all participants’ same-sex marriages, regardless of whether the couple resides in a state that recognizes same-sex marriage.

Qualified plan sponsors may elect to recognize same-sex marriage before June 26, 2013, as long as all of the Code’s qualification requirements are met. The IRS has acknowledged that qualified plan sponsors who choose to recognize same-sex marriage before June 26, 2013 may unwittingly trigger requirements that are difficult to implement and create unintended consequences.

Plan Amendments. Qualified retirement plan documents that exclude same-sex spouses from the definition of “spouse” must be amended. Where a qualified plan’s terms are not inconsistent with the outcome of Windsor, a plan amendment is generally not required. A clarifying amendment, however, may be useful for purposes of plan administration. If no amendment is made to a qualified plan, it nonetheless must be operated in a manner that reflects the outcome of Windsor.

Deadline to Adopt Plan Amendments. The deadline for qualified plan sponsors to adopt a plan amendment to implement Windsor is the later of (i) December 31, 2014, or (ii) the applicable deadline under Section 5.05 of Rev. Proc. 2007-44. (Section 5.05 of Rev. Proc. 2007-44 provides that plan sponsors must generally adopt plan amendments by the later of (i) the end of the plan year in which the change is first effective , or (ii) the due date of the employer’s tax return for the tax year that includes the date the change is first effective.) 

Code Section 436(c) Rule. In general, under Code Section 436(c), an amendment to a single-employer defined benefit plan that increases plan liabilities cannot take effect unless either the plan’s adjusted funding target attainment percentage is sufficient or the employer makes additional contributions to the plan, as specified under Section 436(c)(2). Notice 2014-19 provides the following special rule for single-employer defined benefit pension plans: a qualified plan amendment that serves to implement Windsor and that takes effect on June 26, 2013 will not be treated as an amendment to which Code Section 436(c) applies. In contrast, Code Section 436(c) does apply to a qualified plan amendment that serves to recognize same-sex marriage and that takes effect before June 26, 2013. 

Action Steps for Employers. Employers are advised to review retirement plan operations to ensure that their plans have been administered consistently with Windsor and correct any errors, if necessary. Corrections involving the exclusion of same-sex spouses from rights under the plan should be made consistent with the IRS’s correction methodology in Rev. Proc. 2013-12, and an IRS filing may be required, depending on the size of the error.

Employers should also notify employees of the changes to the rights of same-sex spouses to employer provided benefits under all benefit plans, including qualified retirement plans. This may include email or written notifications requesting that same-sex spouses update their personnel records (to include their spouse’s information) and re-soliciting beneficiary designations, as required. Employers should proactively communicate to employees the changes that resulted from Windsor and obtain appropriate documentation for all employees in same-sex marriage as soon as possible.

Compliance Refresher: Fee Disclosure Deadlines

Effective as of July 2012, retirement plan service providers must provide plan sponsors with a disclosure regarding the compensation they receive for the services provided (i.e., the ERISA 408(b)(2) disclosure). In addition, effective as of August 2012, employers that sponsor retirement plans with participant-directed accounts must disclose detailed investment-related information to participants using a comparative chart format (i.e., the ERISA 404(a)(5) disclosure).

Retirement plan sponsors and service providers are advised to review the timing requirements for these mandatory disclosures and determine whether any information requirements have changed since the original disclosures. This article will review the distribution deadlines for each disclosure and if applicable, any transitional relief provided by the Department of Labor (“DOL”).

408(b)(2) Disclosures. The service provider fee disclosure mandate under the DOL’s 408(b)(2) regulations became effective on July 1, 2012. Accordingly, covered service providers must have provided such fee disclosures to all existing plan sponsor clients by July 1, 2012. Service providers must provide updated fee disclosures to plan sponsors following a change in fee information as soon as practicable, but in no event later than 60 days after the change.

Barring a change in fee information, service providers need only furnish updated fee disclosures to plan sponsors when the underlying service agreement is extended or renewed. Where a service provider enters into a new service arrangement with a plan sponsor, it must provide the mandatory fee disclosure “reasonably in advance” of the commencement of services.

It should be noted that recordkeepers are subject to additional 408(b)(2) disclosure rules. In addition to providing a 408(b)(2) fee disclosure reasonably in advance of being hired, recordkeepers must also provide fee and expense information concerning the plan’s investment options. Instead of the 60-day deadline for providing updated disclosures after a change in fee information occurs, however, recordkeepers need only provide updated disclosures on an annual basis.

404(a)(5) Disclosures. The DOL’s 404(a)(5) regulations require plan sponsors to distribute, on an annual basis, a comparative chart to participants that summarizes the plan’s investment options as well as provide, on a quarterly basis, certain fee disclosures to participants. Plan sponsors must furnish the comparative charts on an annual basis, meaning at least once in any 12-month period.

Plan sponsors of calendar year plans were required to furnish the first comparative chart by August 30, 2012, and the first quarterly fee disclosure by November 14, 2012. Thus, if the 2012 Comparative Chart was provided to participants in August 2012, the next comparative chart (the “2013 Comparative Chart”) need not have been provided until August 2013.

DOL recently issued regulatory relief that affects the timing of plan sponsors’ 404(a)(5) disclosures. In Field Assistance Bulletin 2013-02 (“FAB 2013-12”), DOL provided plan sponsors with an additional six-month period for furnishing the 2013 Comparative Chart. Accordingly, a plan sponsor that provided the 2012 Comparative Chart in August 2012 had until February 2014 to provide the 2013 Comparative Chart. Many plan sponsors used this regulatory relief to “reset” the annual timing for the Comparative Chart so as to align its distribution with other participant disclosures and to also allow the 2013 Comparative Chart to reflect performance data for the full 2013 calendar year. 

Plan sponsors that, prior to the issuance of FAB 2013-02, had already taken steps or incurred administrative costs to furnish the 2013 Comparative Chart by the original deadline (i.e., August 2013) were provided a similar six-month grace period for furnishing the next comparative chart (the “2014 Comparative Chart”). While plan sponsors must furnish comparative charts to participants on at least an annual basis, there is no restriction against plan sponsors distributing comparative charts on a more frequent basis.

Re-Cap of Fee Disclosure Deadlines. The 408(b)(2) regulations require covered service providers to furnish disclosures to plan sponsors in the following four instances:

    • when the service provider is first hired,
    • when a service provider has changes or corrections to its previous disclosures,
    • when a service provider’s contract or arrangement is extended or renewed, and
    • when the plan’s record keeper has updated fee and expense information for the plan’s investment options (but only on an annual basis).

With respect to the ERISA 404(a)(5) disclosures, the DOL (pursuant to FAB 2013-02) provided plan sponsors with a one-time additional six-month grace period for furnishing the annual comparative charts so that distribution efforts could be coordinated with other participant disclosures. Indeed, many plans have already availed themselves of this six-month grace period when distributing the 2013 Comparative Chart. Plan sponsors that were in the process of furnishing the 2013 Comparative Chart when FAB 2013-12 was released have the opportunity delay furnishing the 2014 Comparative Chart until as late as February 2015.

Society of Actuaries Releases New Mortality Tables

Defined benefit pension plan sponsors use mortality tables for a variety of purposes, including calculating lump sum distributions and minimum contribution requirements. The IRS mandates the mortality tables that plan sponsors must use when calculating lump sum distributions and minimum contributions obligations. 

Currently, plan sponsors must use the RP-2000 mortality table to determine present value lump sum conversions and minimum contributions. The Society of Actuaries (the “SOA”) published RP-2000, and it is based on data from over 20 years ago. Given that the RP-2000 data is stale and that the Pension Protection Act of 2006 mandated a review of IRS-required mortality tables every ten years, the SOA, in 2009, began a study to update underlying mortality assumptions.

In February 2014, the SOA released “exposure drafts” of a new mortality table, RP-2014, and a new mortality improvement scale. RP-2014 contained a new table for disabled life mortality, and separate tables for white collar and blue collar participants. As expected, RP-2014 reflects longer life expectancies. The SOA has asked the actuarial community to submit comments on RP-2014 on or before May 31, 2014. After reviewing these comments, the SOA will issue a final report containing the RP-2014 and the new mortality improvement scale.

IRS Notice 2013-49 contains the mortality tables that plan sponsors must use for the 2014 and 2015 valuation years. These tables are predicated on RP-2000. IRS is expected to require plan sponsors to begin using RP-2014 for the 2016 valuation year. For accounting purposes, however, plan sponsors may elect to adopt RP-2014 earlier to determine pension liabilities.

While the final content of RP-2014 is unknown, the following is certain: in application, RP-2014, which reflects longer life expectancies, will produce larger pension liabilities and increase the cost of lump sum distributions and plan contribution obligations. RP-2014 will also affect defined contribution plans, as annuities purchased with account balances will cost more and provide lower monthly benefits.

In view of the imminent release of RP-2014, plan sponsors are advised to consult with their ERISA counsel and actuaries to formulate strategies to manage the increased pension plan liabilities and contribution obligations that will result.

Form 8822-B: What is it and Who Needs to File it?

To maintain correct ownership details, curb abusive tax schemes, and ensure that the correct individual is contacted regarding tax matters, the IRS has mandated new requirements to report a change in the identity of a “responsible party” for entities that have an employer identification number (“EIN”). Effective as of January 1, 2014, an entity (e.g., a plan sponsor, plan administrator or plan trust) must report a change in its “responsible party” by completing and filing IRS Form 8822-B with the IRS within 60 days of the change. 

Background. As a general rule, every entity must obtain an EIN for tax filing and reporting purposes. To obtain an EIN, the IRS requires an entity to complete Form SS-4, “Application for Employer Identification Number.” Before January 2010, the name and identifying number (i.e., social security number) of the principal officer, general partner, grantor, owner or settlor was reported on Form SS-4. Effective January 2010, the IRS revised Form SS-4 to instead report the name and social security number of the entity’s “responsible party.” IRS, however, believed that, in many circumstances, the individual originally reported on Form SS-4 was either acting on behalf of the entity or no longer in that position.

Who is a “Responsible Party”? Form 8822-B instructions define “responsible party” as the “person who has a level of control over, or entitlement to, the funds or assets in the entity that as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the entity and the disposition of its funds and assets.”

In the context of retirement plans, the IRS has published guidance as to whom is a “responsible party.” (See Issue 2013-8 of Employee Plans News.) According to the IRS, a responsible party for retirement plans “is the person who has a level of control, directly or indirectly, over the funds or assets in the retirement plan.”

For benefit plans where the entity that serves as the plan administrator is not the plan sponsor, such entity will have its own EIN. Consequently, in cases where the plan administrator’s “responsible party” has changed, a separate Form 8822-B must be filed.


Penalty for Failing to File Form 8822-B. Currently, there is no penalty for failing to file a Form 8822-B. However, entities that fail to provide the IRS with a current mailing address or the identity of its responsible party run the risk of not receiving a notice of deficiency or a notice of demand for tax, meaning that penalties and interest will continue to accrue on any tax deficiency.

Action Steps. Going forward, plan sponsors and plan administrators are advised to report changes in their “responsible party” by filing Form 8822-B with the IRS within 60 of such change. Currently, Form 8822-B cannot be e-filed.