UPDATE: David Mack Henderson notified Dallas Voice this morning (Friday, Dec. 5), that he has located information on the IRS website indicating that DEFINED BENEFIT plans also are required to recognize same-sex marriages. See InstanTEA for more information.
New IRS rule based on the Windsor decision will force Texas to recognize some same-sex marriages
As the first week in December wound down, LGBT Texans were still waiting for word out of San Antonio on whether federal District Judge Orlando Garcia would lift the stay on his February ruling declaring Texas’ same-sex marriage ban unconstitutional.
In the meantime, though, same-sex marriages were already being recognized in the Lone Star State, although only under very limited circumstances. And yet, the penalty for those entities unwilling to abide by the rules of those limited circumstances, the fall-out could be severe.
Thanks to the efforts of Jonathan Saenz and Texas Values, a group working to keep it from being implemented, LGBT activists in Dallas and Fort Worth recently learned of a ruling from the Internal Revenue Service requiring that certain types of retirement and benefit plans recognize same-sex marriages.
Resource Center Communications and Advocacy Manager Rafael McDonnell and Fairness Fort Worth President David Mack
Henderson said that requirement means that governmental agencies that offer employees 401(a) retirement plans — a class which includes the more well-known 401(k) plans — and the “125 cafeteria plans” must recognize the same-sex spouses of employees participating in those plans, even though state law prohibits such recognition.
The ruling requiring the recognition was handed down by IRS officials in September 2013, in the wake of the U.S. Supreme Court’s ruling in United States v. Windsor overturning the portion of the Defense of Marriage Act prohibiting the federal government from recognizing legal same-sex marriages.
“The changes [demanded by the IRS] basically mean that same-sex marriages are recognized [for federal purposes] on a state of ceremony basis, not a state of domicile basis,” McDonnell said this week. “That means that if you were married in a jurisdiction that does legally recognize same-sex marriage, then your 401(a) retirement plan has to legally recognize your marriage, even if you live in a state like Texas that doesn’t.”
According to information provided by the IRS office in Dallas, “Qualified retirement plan operations must reflect the outcome of Windsor as of June 26, 2013. … For federal tax purposes, effective as of September 16, 2013, Rev. Rul. 2013–17 adopts a general rule recognizing a marriage of same-sex individuals that is validly entered into in a state whose laws authorize the marriage of two individuals of the same sex, even if the individuals are domiciled in a state that does not recognize the validity of same-sex marriages … .”
The IRS does not, however, give the same legal standing to domestic partnerships, civil unions or “other similar formal relationship[s].”
McDonnell said he and other Dallas activists have been “working with Dallas County over the last several months, talking about how to make their policies and benefits more LGBT-inclusive.” When he heard about the IRS ruling, McDonnell said he “reached out to” the
Commissioners Court who asked the county’s human resources director, Mattye Mauldin-Taylor, if the county’s retirement plan complies with the IRS requirements.
Mauldin-Taylor in turn asked Lavonda Haynes, “who handles most retirement issues for Dallas County.” Haynes then reviewed the question with officials at Texas County and District Retirement System, the county’s retirement plan.
According to that review, Mauldin-Taylor said, TCDRS is “already in compliance with the new IRS regulations.”
But McDonnell and Henderson both noted technicalities that could cause problems for LGBT individuals trying to designate their legal same-sex spouse as a beneficiary of their retirement plan.
McDonnell noted that even though the TCDRS is apparently compliant in practice, the entity’s paperwork has not been updated. It allows employees to designate an opposite-sex spouse, but not a same-sex spouse.
He said he was told that LGBT employees can enter their same-sex spouse as beneficiary on the current paperwork as “other than spouse.” And that just won’t fly with the IRS, given that only legal spouses are eligible for certain benefits under these plans.
“Words matter,” Henderson said, noting that the IRS ruling clearly states that “additional alternatives are provided for surviving spouses that are not available to non-spousal beneficiaries.”
Henderson and McDonnell called the TCDRS’s compliance “closet compliance” at best because even though the benefits are available to LGBT employees and their legal spouses, no one is telling those employees.
“What good is a benefit if you don’t know you have access to it?” McDonnell said.
TCDRS is one of several defined contribution retirement plans in Texas that are subject to the new IRS ruling regarding same-sex spouses. According to the State Pension Review Board, there are 171 defined contribution local retirement systems in Texas with about 100,000 members and about $2 billion in total net assets combined. That includes 401(a) plans, 401(k) plans and 457 plans.
There are 12 other retirement systems enabled by state statute with their own provisions. At least some of those plans are 401(a), 401(k) or 457 plans which are required to recognize legal same-sex spouses of plan members.
Among those 12 is the Dallas Police and Fire Pension System, a group that recently chose to put off implementing full benefits for its
LGBT members, even though the Dallas City Council had already voted in favor of those benefits. According to a DPFP overview publication from 2013, “DPFP is a defined benefit plan qualified under section 401(a) of the Internal Revenue Code, and serves almost 9,300 families of police officers and firefighters.”
“About a month ago, Dallas Police and Fire voted to just kick the can down the road instead of acting to do what’s right,” McDonnell said. “They haven’t made the changes, and they need to. They are out of time. This is not about some one person’s strongly-held religious beliefs. This is about a governmental body doing its job.”
The Fort Worth Employees Retirement Fund is another of the 12. Dallas Voice contacted Mayor Betsy Price’s office to determine if that plan is also a defined contribution plan but had received no response as of deadline on Thursday, Dec. 4.
Henderson, a tax preparation specialist, explained that the “125 cafeteria plans” included in the IRS ruling are those benefit plans that allow employees to contribute to savings accounts that can then be used to pay for certain specified expenses, such as health care or child care. He said they are called “cafeteria plans” because plan members have “a whole buffet of benefit options to choose from.”
The cafeteria plans, like the 401(a), 401(k) and 457 plan contributions, are “pre-tax” dollars, which means that those funds are not subject to federal taxes. And like the retirement plans, the cafeteria plans almost must recognize employees’ legal same-sex spouses.
Although the retirement plans in question are, technically, supposed to be in compliance with the IRS ruling in practice already, there is a grace period. According to Internal Revenue Bulletin 2014-17: “The deadline to adopt a plan amendment pursuant to this notice is the later of the otherwise applicable deadline under section 5.05 of Rev. Proc. 2007–44, or its successor, or Dec. 31, 2014. Moreover, in the case of a governmental plan, any amendment made pursuant to this notice need not be adopted before the close of the first regular legislative session of the legislative body with the authority to amend the plan that ends after Dec. 31, 2014.”
That means the Texas Legislature apparently must bring these plans fully into compliance by the end of the 2015 legislative session.
McDonnell noted that corporate defined contribution retirement plans are also required to comply with the IRS ruling on same-sex spouses.
Given the political victories by ultra-conservatives in last month’s election, McDonnell and Henderson said it will be “interesting to see” what happens in terms of the Legislature updating these retirement plans.
But what happens if to those plans that fail to comply? Those plans are disqualified and “the plan’s trust loses its tax-exempt status and becomes a nonexempt trust.”
That means, in essence, that all contributions to these funds that had, in the past, been tax-deferred will now be taxed.
“Does the state of Texas really want to do that? To essentially send its retirement system into chaos?” McDonnell said. “It would be catastrophic.”
Both McDonnell and Henderson criticized the state and other governmental agencies that may already be in what they called “closet compliance” with the new IRS ruling.
“It’s one thing to make a plan change functionally. But if you don’t tell anybody about it, are you really making a change?” McDonnell said.
“The state is trying to tell the IRS, see, we are complying. But they are walking a fine line, saying we’re not going to comply with your language. We’re going to comply, but not tell people about it and not use the language the IRS says to use,” Henderson said.
“The state is talking out of both sides of its mouth. No, actually, the state is talking out one side of its mouth and keeping the other side clamped shut, just drooling and dribbling with conflicting language,” he said.
McDonnell added, “This is not a huge thing when it comes to Texas recognizing same-sex marriage. It only applies to certain people in certain circumstances. For those certain people, it is a big thing. Overall, it’s a small thing, but it is something. It’s a baby step that’s being compelled by the IRS.”
This article appeared in the Dallas Voice print edition December 5, 2014.