Plan Administrators Face Beneficiary Hurdles After IRS Windsor Guidance, Attorneys Say

Retirement plan sponsors should check beneficiary designations for participants' same-sex spouses in light of recent Treasury Department and Internal Revenue Service guidance on the applicability of the U.S. Supreme Court's Windsor decision to retirement plans, if they haven't already done so, benefits attorneys told Bloomberg BNA.         

The most significant area under the new guidance, posted to the IRS website April 4 in the form of answers to frequently asked questions, is beneficiary designations, said Todd A. Solomon, a partner in the Chicago office of McDermott Will & Emery. Unfortunately, many plan participants might not even know that their spouse—whether opposite-sex or same-sex—is automatically considered to be the rightful beneficiary upon a participant's death, he said.         

An example of a situation in which beneficiary designation rules can now be problematic, Solomon said, is one in which a participant designated his or her child as a beneficiary four years ago, then married a same-sex spouse within the past year. In the post-Windsor world, the beneficiary designation of the child is trumped, he said.         

As a result of such situations, many plan sponsors have been reaching out to participants about the beneficiary rules to let them know what the new rules are and the implications for beneficiary designations, Solomon said.         


Another major issue plan sponsors will need to deal with is making sure that there is consent by a same-sex spouse in cases in which the spouse isn't listed as a beneficiary, said Joy M. Napier-Joyce, a shareholder in the Baltimore office of Jackson Lewis PC and leader of the firm's employee benefits practice group.         

“That begs the question of how do we know if somebody is legally married. That's the most perplexing question for a lot of employers,” Napier-Joyce said. Sponsors will need to do some information gathering to determine where potential pitfalls lie, she said.         

Guidance on such information gathering isn't likely to come from the IRS or the Department of Labor, Napier-Joyce said.         

She said that her firm's advice to employers has been to tell employees that they are following the rules of the post-Windsor world and that they are striving to make sure all plan participants are properly taken care of, and that therefore, employees should volunteer information on whether they are legally married or have a spouse.         

The IRS guidance included six questions and answers in which the IRS addressed how the Supreme Court's June 2013 in United States v. Windsor, 133 S.Ct. 2675, 57 EBC 1577 (2013), which struck down a key part of the Defense of Marriage Act, applies to retirement plans.         

The agency answered questions regarding Section 403(b) plans, multiemployer plans, and profit-sharing and stock bonus plans, addressing such issues as beneficiary designations, plans' recognition of same-sex marriages and plan amendments.         

The IRS posted the guidance the same day the agency and Treasury issued Notice 2014-19, which said that retirement plans can apply guidance on the application of the Supreme Court decision prospectively as of June 26, 2013, the date of the Windsor ruling.         

Plan Language          

The rule that provides that beneficiary rights are automatically given to a spouse provides another quirk for plans to consider when they have divorced participants, Napier-Joyce said.         

In a 2009 decision, Kennedy v. Plan Adm'r of the DuPont Savings and Inv. Plan, the Supreme Court applied the “plan documents” rule in determining that a plan administrator properly paid benefits to the ex-wife of a plan participant who had waived her right to such benefits in a divorce agreement but who was still named as the participant's beneficiary at the time of his death, Napier-Joyce said.         

Under the “plan documents” rule at Section 404(a)(1)(D) of the Employee Retirement Income Security Act, plan administrators are required to act “in accordance with the documents and instruments governing the plan.”         

In the wake of the decision, “there was renewed focus by plans in checking beneficiary designations and adding plan language, if none existed before, to provide that the designation of a spouse as a beneficiary is automatically revoked following a divorce (in an attempt to avoid multiple parties fighting over the benefit),” Napier-Joyce said in an e-mail.         

As a best practice, plan sponsors should amend their plans now to clarify the definition of spouse and make clear which rights are available, despite the fact that the IRS has provided them with more time to make their amendments, Solomon said.         

Even sponsors that don't need an amendment should provide “soft participant communications” about the new rules, Napier-Joyce said. Plan sponsors should make sure that documents and information distributed during open enrollment or to new hires reflect the new rules, she said.          

Rhonda G. Migdail, of counsel to Keightley &  Ashner LLP in Washington and a former Employee Plans manager at the IRS, pointed out some other questions that remain with regard to same-sex divorce.         

Offering a hypothetical situation in which an employer has an employee who was married in a state that recognizes same-sex marriages but now resides in a state that doesn't recognize such marriages, she said, “The IRS guidance has talked about the state-of-celebration rule for determining whether they are as married for federal law purposes. But what if they want to get divorced and they're living in a state that doesn't permit it? How do you determine that? What if they want a qualified domestic relations order, how do they even go about getting one? What state do they need to do it in? How is the plan going to determine whether it's valid or not?”

Excerpted from a story that ran in Pension & Benefits Daily (4/23/2014).