What ruling on same-sex marriage means for retirement accounts
September 12, 2013
This summer's U.S. Supreme Court ruling on same-sex marriage means that many couples will soon qualify for certain favorable IRA and retirement plan provisions that were previously available only to opposite-sex spouses.
According to new guidance from the Treasury Department and the IRS, rules set to take effect September 16 specify that same-sex couples who marry within jurisdictions that recognize their marriages will be treated as married for federal tax and retirement plan purposes, regardless of how the jurisdiction where they live treats same-sex marriage. For example, if a gay couple residing in Virginia (which does not recognize same-sex marriage) travels to neighboring Maryland (which does) to tie the knot, their marriage would be recognized under federal retirement guidelines.
The guidance seeks to address uncertainty following the U.S. Supreme Court's decision in June striking down a key section of the federal Defense of Marriage Act (DOMA). The section of DOMA that was ruled unconstitutional said that, for purposes of federal law, the term "marriage" must be limited to marriage between a man and a woman and that the term "spouse" must be limited to opposite-sex spouses.
"This ruling provides some clarity as we sort through the issues of implementing the Supreme Court's decision," said Jamey Delaplane, head of Vanguard ERISA and Fiduciary Services.
Although the ruling does not specifically mention IRAs by name, the guidance presumably applies to IRA rules regarding spouses because these rules stem from federal tax laws and regulations.
The ruling examined
The Treasury Department and the IRS said that any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be recognized for federal tax purposes and by retirement plans. Under the ruling, registered domestic partnerships, civil unions, or similar relationships recognized under state law will not receive new spousal rights.
"This means that the state of celebration, not the state of domicile, controls whether a same-sex couple's marriage will be recognized under federal tax laws," Mr. Delaplane said. "This outcome will assist same-sex couples with their financial and retirement planning and avoid the situation where access to federal spousal rules would turn on a couple's current state of residence."
Currently, 13 states and the District of Columbia recognize same-sex marriage. The 13 states are California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington.
Some practical effects of the guidance include the following:
- Same-sex spouse beneficiaries will qualify for the more favorable spousal treatment under required minimum distribution (RMD) rules.
- Same-sex spouses will be able to transfer IRA and retirement plan assets tax-free upon divorce.
- Same-sex spouses named as beneficiaries on their spouse's IRA will be able to assume the account—that is, treat it as his or her own. A spousal beneficiary also can roll over distributions from a deceased spouse's account in an employer-sponsored retirement plan into an IRA in his or her own name.
- Qualifying hardship distributions from a 401(k) plan will include distributions to pay for medical care, tuition, and burial costs for a same-sex spouse.
- Legally married same-sex spouses, regardless of which state they live in, will have spousal consent rights under certain types of employer-sponsored retirement plans that currently are available to only opposite sex spouses. This will affect matters such as consent to designate a non-spouse beneficiary; qualified joint and survivor annuity benefits; and, qualified pre-retirement survivor annuity benefits.
Key issues remain
The IRS intends to issue further guidance regarding whether the Supreme Court's decision and the recent IRS interpretation apply to same-sex marriages and events and transactions occurring before the Supreme Court's decision.