Mid-Year Amendments to Safe Harbor Pension Plans Following Windsor Decision

4 Jul

Internal Revenue Service Notice 2014-37 addresses mid-year amendments to “safe harbor” pension plans, clarifying the earlier Notice 2014-19. Notice 2014-19 provided guidance on the application of U.S. v. Windsor, 133 S.Ct. 2675 (2013), which struck down the Defense of Marriage Act.

“Safe harbor” plans allow business owners to maximize personal contributions to the company’s retirement account, receive the benefit of company matching contributions, and reduce some of the limitations associated with non-discrimination testing. The employer either must make a matching contribution for all participating employees, on the first 4% of each employee’s compensation, or contribute 3% of the employee’s compensation for each eligible employee, regardless of whether the employee participates in the plan. Under a traditional plan, if too few employees participate, a formula limits the amount that the business owner can personally contribute.

Following the Windsor decision in June 2013, the Service adopted Rev. Rul. 2013-17, holding that, for Federal tax purposes, the terms “spouse,” “husband and wife” etc., include an individual married to a person of the same sex, if the individuals are lawfully married under state law. The couple may be domiciled in a state that does not recognize such marriages. Not covered are individuals (of the same or opposite sex) who have entered into a registered domestic partnership or civil union that is not denominated as a marriage under the laws of that state.

The Service is authorized to prescribe the extent to which any judicial or administrative decision is to be applied without retroactive effect. Rev. Rul. 2013-17 is applied prospectively as of September 16, 2013. Taxpayers may rely on the ruling retroactively with respect to any employee benefit plan, for limited purposes with respect to certain health coverage and fringe benefits.

Several Code provisions provide special rules with respect to married participants in qualified retirement plans.

(i) Certain qualified retirement plans must provide a qualified joint and survivor annuity (QJSA) upon retirement to married participants (and generally must provide a qualified preretirement survivor annuity (QPSA) to the surviving spouse of a married participant who dies before retirement). The QJSA (or QPSA) may be waived by a married participant only with spousal consent. If such a plan permits loans to participants, the plan must obtain the consent of the spouse before making a loan to the participant.

(ii) Certain qualified defined contribution retirement plans are exempt from the QJSA and QPSA requirements, provided that a married participant’s benefit is payable in full to the participant’s surviving spouse, unless the spouse consents to the designation of a different beneficiary.

(iii) Under the required minimum distribution rules and the rollover rules, additional alternatives are provided for surviving spouses that are not available to non-spousal beneficiaries.

(iv) Generally a spouse is treated as owning shares owned by the other spouse, for purposes of determining whether corporations are members of a controlled group.

(v) Generally a spouse is treated as owning shares owned by the other spouse, for purposes of determining whether an employee is a key employee, including whether an employee is considered a 5% owner.

(vi) An employee stock ownership plan (ESOP) that acquires certain employer securities generally must prohibit the allocation of those securities for the benefit of certain individuals, including the spouse of the seller and of any individual who owns 25% or more of the securities.

(vii) No portion of the assets of an ESOP attributable to employer securities consisting of S corporation stock generally may accrue during a nonallocation year for the benefit of any disqualified person or certain family members (including spouse).

(viii) The anti-alienation rules do not apply to the recognition of an alternate payee’s right to receive a portion of the benefits payable to a participant under a plan pursuant to a qualified domestic relations order (QDRO). An alternate payee who is a spouse or former spouse of the participant is treated as the distributee under a QDRO.

Notice 2014-37 provides guidance on plan amendments to reflect the outcome of the Windsor decision, which are adopted after the beginning of a plan year, and which apply to a 401(k) or 401(m) safe harbor plan. These amendments were first addressed in Q&A-8 of Notice 2014-19.

Notice 2014-19 addressed the deadline to adopt a plan amendment pursuant to that Notice. The deadline is the later of (i) the end of the plan year in which the change is first effective, (ii) the due date of the employer’s tax return for the year that includes the date the change is first effective, or (iii) December 31, 2014. In the case of a governmental plan, any amendment need not be adopted before the close of the first regular legislative session of the body with the authority to amend the plan that ends after 2014.

A 401(k) safe harbor plan must be adopted before the beginning of the plan year and generally must be maintained throughout a full 12-month plan year. Treas. Reg. § 1.401(k)-3(e)(1).  Similar rules apply to § 401(m) safe harbor plans.  Following Notice 2014-19, the Service was asked whether a safe harbor plan may adopt a mid-year amendment.  The Service responds affirmatively in Notice 2014-37: a plan will not fail to satisfy the requirements to be a safe harbor plan merely because the plan sponsor adopts a mid-year amendment under Notice 2014-19.



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