Now that the Department of Labor (DOL) has adopted the approach used by other federal agencies (Treasury, IRS) in terms of how same-sex couples must be treated, individuals in such relationships should take a close look at who they named as beneficiaries on their retirement accounts. In fact, this should be done for every account that requires a beneficiary designation- from life insurance policies to annuities.
DOL oversees company-sponsored retirement plans covered by ERISA, the Employee Retirement Income Security Act of 1974. This includes 401(k), 403(b), 457, profit-sharing and defined benefit retirement plans. Under ERISA, an employee’s spouse must be the primary beneficiary of the account.
In addition, ERISA governs so-called “welfare plans” which provide health, life, dental and other types of benefits.
In June, the U.S Supreme Court ruled in United States v. Windsor that restricting the definition of “marriage” to the legal union of a man and a woman was unconstitutional. This left plan administrators looking for guidance about how to distribute retirement assets in the case of same-sex couples. In fact, a case was recently decided by the U.S. District Court for Eastern Pennsylvania concerning this very matter. As part of this case, the parents of Sarah Farley sued her partner claiming she was not entitled to the money in Sarah’s profit-sharing plan because the law did not recognize her as their daughter’s “spouse.” Based on the Windsor decision, the district court ruled against them.
Thankfully, similar cases will not have to clog the courts. According to DOL’s guidance, all retirement plans covered by ERISA must interpret “spouse” to mean “any individuals who are lawfully married under any state law, including individuals married to a person of the same sex… but who are domiciled in a state that does not recognize such marriages.”(1)
Same-Sex Taxes: Joint vs. Separate
Same-Sex Marriage Cases Now Hitting State Courts: Who Inherits Your 401(k)?
What to Know About Section 1031 Exchange of Property
Same-Sex Marriage Migration?
Same-Sex Couples Can Now File for Social Security
How to Calculate a Social Security’s Spousal Benefit
The Cost and Tax Implications of Redefining Marriage
Importantly, DOL points out that “spouse” and “marriage” do not include other types of relationships, such as domestic partnerships or civil unions, even if these were formally sanctioned by a state and “regardless of whether the individuals who are in these relationships have the same rights and responsibilities as those individuals who are married under state law.”
Furthermore, by tying the definition of “spouse” and “marriage” to where the marriage was performed instead of where a couple currently lives, DOL makes it simpler, easier and less costly for employers to apply the new rules. There is uniformity across all 50 states.
According to Mark Johnson, founder of Dallas-based ERISA Benefits Consulting, this means that although Texas does not recognize same-sex marriage, if “a same-sex couple living in Texas got married in California or New York… an employer in Texas should consider them married for benefit purposes.”
Johnson, who worked for years in the human resources department of American Airlines, recommends that same-sex couples “should think, act and analyze [their employee benefits] Just like a heterosexual couple.” This means taking a “look at the plans each spouse has through their employer and consider the coverage available.”
For instance, which employer provides the best health insurance? Compare deductibles, co-pays, coverage and cost. Would it be more advantageous for each individual to get coverage through his/her own employer or would it be better for one to opt for employee-plus-spouse?
He also points out that the requirement that assets in your account pass to your “qualified” spouse if you die can only be changed if your spouse waives this right in writing. Furthermore the waiver must be signed after the date of the marriage; a pre-nuptial agreement is not valid. In addition, according to Johnson, a “qualified’ spouse is “someone you’ve been married to for [at least] a year.”
Reviewing the beneficiary designations on all accounts that require them is an exercise everyone should go through at least annually. It only takes minutes. Of course, if your beneficiary has died or you go through a divorce, you will want to update your plans as soon as possible.
For example, say you got divorced five years ago. As a result, you named your child as the beneficiary of your 401(k). Last May you re-married. By law, unless your new spouse- whether of the same or opposite sex- signs a valid waiver, s/he will receive your retirement assets if you die, not your son or daughter. Under the circumstance, you might want to name your child as the beneficiary of other assets you own, such as an IRA.
1. DOL Techinical Release 2013-04 specifically clarifies that “the term ‘state’ means any state of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, Wake Island, the Northern Mariana islands, and other territory or possession of the United states, and any foreign jurisdiction having the legal authority to sanction marriages.”
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
If you have a question for Gail Buckner and the Your $ Matters column, send them to: firstname.lastname@example.org, along with your name and phone number.