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IRS Adopts State of Celebration Rule – If Valid Where Performed, You are Married for Federal Tax Purposes

In Revenue Ruling 2013-17, the Internal Revenue Service provided clear guidance to define “spouse” for all purposes under the Internal Revenue Code. A “spouse” includes a same-sex spouse whose marriage is recognized by the state in which the marriage occurred. Use of this “state of celebration” rule will greatly simplify employee benefit plan administration for employers. However, the IRS indicated in this guidance that it will provide more direction on the impact of this definition on employee benefit plans.

How Did the IRS Define the State of Celebration Rule?

These are the bottom line holdings from the IRS guidance, which apply for all purposes under the Internal Revenue Code:

  • The terms “spouse,” “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes a marriage between individuals of the same sex.
  • A marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex will be recognized for Federal tax law purposes even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages. For example, same-sex marriage is not recognized in Missouri. However, a same-sex couple that marries in Iowa but lives in Missouri will be considered married for Federal tax purposes because the marriage is valid in Iowa where the

Breaking – IRS Guidance on Same-Sex Marriage

Today the IRS release Revenue Ruling 2013-17 generally providing that same-sex marriages would be recognized for Federal tax purposes if they were recognized under the laws of the state in which the marriage occurred.  This has generally been referred to as the “place of celebration” rule.

In addition, the IRS released FAQs on both same-sex marriage and domestic partnerships and civil unions.  These FAQs provide additional guidance on some relevant issues for plan sponsors, including qualified retirement plans, the tax impacts of health coverage for same-sex spouses, and cafeteria plans.

We’ll provide additional analysis in future posts, so stay tuned!

Governance of Tax-Qualified Retirement Plans

Governance of Tax-Qualified Retirement Plans

August 7, 2013

Authored by: benefitsbclp

Governance of tax-qualified retirement plans should focus on protecting participants and reducing the risk of liability for plan fiduciaries.  In the attached video, Sheldon Smith provides a brief outline of the duties imposed on plan fiduciaries and best practices fiduciaries should follow regarding plan governance.

(You can also find the video here.)

Lessons to be Learned From a Flawed 401(k) Fee Study (Part 2)

Lessons to be Learned From a Flawed 401(k) Fee Study (Part 2)

August 5, 2013

Authored by: benefitsbclp

In our prior post, we detailed some significant deficiencies in the study that Yale Law School Professor Ayers is planning to release and the far less threatening Yale official response.  But what steps, if any, should plan administrators take now to mitigate exposure, even if wrongly asserted, that might result from a breach of fiduciary duty action?  And what kind of opportunity does this present for other 401(k) sponsors who are not included in the study?  Recognizing that most 401(k) plan fiduciaries must determine, through proper prudence and process, that plan expenses are reasonable in view of the services provided to participants and that those services are necessary for the proper operation of the plan and in the best interests of the participants, now is a good time to revisit “reasonable and necessary.”

Many of our clients’ plan administrative committees avail themselves of the services of competent, independent investment advisors to assist them in performing the “reasonable and necessary”  analysis and in making these important decisions.  The advisors assist in understanding the 408(b)(2) disclosures, providing cost and service comparisons, negotiating fees, structuring and administering requests for proposal programs, confirming that there are no conflicts of interest with respect to the provisions of investment choices, and providing quarterly reports that assist the committees in fulfilling their duties.  Plan administrators that do not use the services of these independent advisors should conduct similar reviews themselves and be certain that they are capable of fulfilling their obligations in doing

The ESOP as a Solution

The ESOP as a Solution

August 2, 2013

Authored by: Steven Schaffer and Chris Rylands

Employee Stock Ownership Plans (“ESOPs”) can be a good choice for the right company because they can generate liquidity for the owners in a tax-advantaged form, allow the owners to retain de facto, if not legal, control, and provide employee ownership and the resultant productivity and retentive benefits to the business.  Common uses of ESOPs include can have other uses as well, such as:

  • Allowing an owner to exit his or her business but provide an incentive to retain existing management (who may be unable to buy)
  • Allowing a shareholder to diversify his or her holdings through a partial (or total) sale to an ESOP;
  • Providing a vehicle to efficiently redeem unwanted shareholders;
  • Structuring management buy-outs;
  • Providing a buyer for an estate holding closely-held stock;
  • Closing out a private equity fund by selling a portfolio company to an ESOP; and
  • Selling a division to employees.

Using an ESOP has certain advantages over more traditional approaches to address these issues, including:

  • Both principal and interest paid on any leveraging required for the ESOP transaction are tax-deductible.
  • In many circumstances, owners can rollover the proceeds resulting from a sale of their stock to an ESOP into other corporate securities free of federal (and most often, state) income taxes.
  • Even in situations which are not eligible for the tax-free rollover, sellers can get capital gain treatment, rather than dividend treatment, on the sale to an ESOP.
  • Unlike private equity, the ESOPs tend to be passive, longer-term investors.
  • Since

Lessons to be Learned From a Flawed 401(k) Fee Study (Part 1)

Lessons to be Learned From a Flawed 401(k) Fee Study (Part 1)

August 1, 2013

Authored by: benefitsbclp

Typically, academics do research and then write about their findings and conclusions.  However, as has been reported elsewhere, Professor Ian Ayers, the William K. Townsend Professor at Yale Law School, decided to take his findings and conclusions a step further.  He sent a letter to some 6,000 401(k) plan sponsors essentially accusing them of potentially violating ERISA fiduciary duties.   He then went even further and threatened to publicize their identities and advised them that he would assign each of the 6,000 of them with their own hashtag on Twitter when he publicized his study next year in periodicals including the New York Times and the Wall Street Journal.  His threats  have been garnering substantial attention in the popular press.  Needless to say, Professor Ayers has created quite an uproar in the 401(k) plan advisor and consultant communities.  You can read a redacted copy of the letter here.

The Study (and its Flaws)

Professor Ayers indicates in his letter, and in the draft study  that he and Professor Quinn Curtis of the University of Virginia School of Law co-authored, that he used 2009 data from Forms 5500 and from 2009 data compiled by Brightscope, Inc.  Brightscope has advised ASPPA that it had nothing to do with the study and Yale has confirmed that Brightscope’s 2009 information was used with no direct participation by Brightscope.

The draft of the study posted online is already coming under fire from other sources for a

DOMA – Round 2 (The First Decisions After Windsor)

DOMA – Round 2 (The First Decisions After Windsor)

July 31, 2013

Authored by: benefitsbclp

Windsor was decided just over a month ago and we’re already starting to see how courts are interpreting the ruling. Windsor left unanswered the question of whether Part 2 of DOMA, which allows states to bypass the Full Faith and Credit Clause of the Constitution for same-sex marriages validly performed out-of-state, can stand now that Section 3 of DOMA has been deemed unconstitutional.  [Click here or here for additional information.]

Last week, a federal district court in Ohio ignored an Ohio law that refuses to recognize same-sex marriages, even if validly performed in another state (sometimes referred to as a mini-DOMA). In Obergefell v. Kasich, the plaintiffs, both Ohio residents, briefly traveled to Maryland earlier this month to get married, not even getting off the plane before returning home to Ohio. One spouse was dying of ALS and the other wanted to be recorded as the surviving spouse on the death certificate so they were trying to get married as quickly as possible. Now, for purposes of federal and Maryland law (as well as a handful of other states), the couple is validly married. While this case did not overturn the Ohio law (since it only requested a preliminary injunction and not a judgment on the merits), in evaluating the likelihood of success on the merits, the judge granted the couple’s request. The judge stated that by treating lawful same-sex marriages differently than opposite-sex marriages, Ohio law likely violates the Equal Protection Clause of the Constitution. The judge noted

Hit the Reset Button: Complying with Annual Investment Fee Disclosures

Regulations under ERISA Section 404(a) require plan administrators to disclose to plan participants and beneficiaries certain fee and investment performance information about each designated investment alternative made available under a participant-directed defined contribution plan.  For calendar year plans, this information, which includes a comparative chart of all investment alternatives,  was initially required to be provided to participants and beneficiaries no later than August 30, 2012.  In addition, the regulations require that such information also be provided “annually” ( defined to mean at least once in any 12-month period, regardless of whether the plan operates on a calendar year or fiscal year basis).

Re-set Option Offered by Department of Labor

Many plans send required notifications closer to the end of the plan year.  Acknowledging this practice and concerns raised over the cost of a separate distribution covering just this investment information, the Employee Benefits Security Administration (“EBSA”) issued Field Assistance Bulletin No. 2013-02, which grants a one-time “reset” option for the 12-month period.

This “reset” option permits an employer to provide the “2013 comparative chart” after the original 12-month period required by the 404(a) regulations.  However, the chart may not be delayed later than 18 months after the initial comparative chart was provided.

Example 1 from EBSA Guidance:

If a plan administrator furnished the first comparative chart on August 25, 2012, the “2013 comparative chart” would be due no later than August 25, 2013.  In accordance with this Bulletin, however, the Department will take no enforcement action

Congratulations! SCOTUS Said You’re Married! Have You Registered For a Tax Refund?

Since the Supreme Court struck down Section 3 of DOMA, employers and employees face numerous issues, including whether to file claims for tax refunds.  [Additional background information may be found here.]

Background. The Internal Revenue Code permits employers to provide nontaxable group health coverage to their employees’ spouses. However, employers who extended group health coverage to domestic partners and, prior to Windsor, same gender spouses were required to impute, and report on the employee’s W-2, income equal to the fair market value of that coverage. Also, the employer was required to withhold federal income and employment taxes and pay the employer’s share of FICA and FUTA.

Employers. Now that same gender marriages are recognized for federal purposes in certain states, employers who have extended group health coverage to same gender spouses should, on a going forward basis beginning June 26 (the date Windsor was handed down), stop imputing income and withholding and paying employment and income taxes. Employers should also consider filing protective claims for refund of employment taxes paid for prior years.

Employees. Individuals in same gender marriages should also consider filing protective claims for refund for the imputed income. In addition, couples in same gender marriages may wish to explore whether they should file amended returns as married filing jointly. However, the advisability of an amended return depends on whether filing jointly or as a head of household will be advantageous.

Issues to be resolved. Although Edith Windsor will receive a refund with interest of the federal estate

Dealing with Overturn of DOMA – Immediate Steps

Dealing with Overturn of DOMA – Immediate Steps

July 3, 2013

Authored by: benefitsbclp

Section 3 of the Defense of Marriage Act was found to be unconstitutional by the Supreme Court last week in United States v. Windsor, No. 12-307.  This action has created more questions than answers for employers and administrators of ERISA plans.  Most of this uncertainty centers on the fact that the Supreme Court’s decision did not address Section 2 of DOMA, which provides that states do not have to give full faith and credit to the laws of another state which recognizes same-sex marriage.  However, for federal law purposes, the government will look to state law to determine whether someone is a spouse.  This creates uncertainty as to whether the state of residence of an employee or plan participant will dictate whether he or she is or has a spouse at the time a right arises or action is required.  We are hopeful that federal agencies will immediately issue guidance on this issue.  If a spousal benefit issue arises before then that involves these facts, additional consideration is recommended.

Same-sex marriages are permitted in California, Connecticut, Delaware, the District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota (effective August 1, 2013), New Hampshire, New York, Rhode Island (effective August 1, 2013), Vermont and Washington (the Same-Sex Marriage States).  Employers and plan administrators with employees and participants in these states may have immediate issues to address.

To begin the process of unfolding the effect of the Windsor decision, we recommend the following steps:

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