Love and Marriage, DOMA and IRAs

Love and marriage may—according to Frank Sinatra’s hit song—go together like a horse and carriage, but the recent U.S. Supreme Court rulings in the Defense of Marriage Act (DOMA) and California Proposition 8 have placed a fork in the road. With no guidance, IRA trustees and custodians are unsure of which way to turn on the rights of same-sex couples until they determine the full impact of these rulings on IRA program administration.

Under DOMA, only opposite sex-couples could be considered married for purposes of federal law. However, the Supreme Court found that the “spouse” and “marriage” definitions under federal law were unconstitutional for treating legally married same-sex individuals differently from legally married opposite-sex individuals. But the court did not rule on the constitutionality of any state statute that authorizes same-sex marriage. And while the decision invalidates the federal definition of “spouse” and “marriage” the Court’s majority opinion and minority dissent both emphasize that each state is still free to create its own definition of these terms.

California’s Proposition 8 passed as a 2008 ballot initiative and defined marriage as a union between a man and a woman. Two same-sex couples who wished to marry filed suit in federal court, challenging Proposition 8 and prevailed in both the U.S. District Court and Court of Appeals. The decision was appealed to the Supreme Court. In a 5-4 decision, based on a lack of standing by the party bringing the suit, the U.S. Supreme Court refused to rule on the merits of the case, allowing the U.S. District Court’s decision to stand. This means that Proposition 8 cannot be enforced, thereby removing California’s prohibition on same-sex marriage.

IRA trustees and custodians are now questioning how these two landmark rulings will impact their IRA programs.

Married IRA owners and their spouses enjoy many benefits under federal law that other IRA owners do not. A nonworking spouse can make a spousal contribution to an IRA. An IRA owner with a spouse beneficiary more than 10 years younger can determine the required minimum distribution (RMD) based on the longer joint life expectancy of the IRA owner and spouse, rather than the life expectancy divisor from the Uniform Lifetime Table. Upon an IRA owner’s death, a spouse beneficiary can roll over or transfer the deceased owner’s eligible retirement plan assets or IRA to her own IRA, or choose to treat the IRA as her own. And in divorce, an IRA owner can transfer IRA assets to his former spouse tax free.

It would be easy to say that in light of the two Supreme Court rulings, you simply apply the same rules to both same-sex and opposite-sex couples. But given the complexity of the issues, understanding the full impact of these rulings on IRAs will take some time. Federal regulatory agencies and individual states will need to issue guidance on how they interpret the rulings, emerging issues will have to be addressed, and the potential for additional legal challenges exists.

Consider the following issues that IRA trustees and custodians will face in light of the Supreme Court’s recent decisions.

• How will “domestic partnerships” and “civil unions” be treated for purposes of determining rights at the federal level? If a state’s laws treat same-sex couples in a way that is substantially identical to marriage—differing only in terminology—will such couples be afforded the same treatment for federal purposes as same-sex couples whose states recognize their relationship using the term “married?”
• Will “spouse” or “marriage” status—even for the same IRA owner—change when moving to a state with a different definition? If an IRA owner was married to a same-sex individual in a state that permitted same-sex marriage, but then moves to a state that does not recognize the marriage, is the IRA owner no longer “married” to that individual for federal tax and policy purposes?
• How will conflicts between IRA plan documents and state law be resolved? If an IRA plan document requires that the law of the sponsoring financial organization’s state be used when a dispute arises, and the IRA owner’s state law definition of marriage is more expansive, can you (or will you be required to) rely on the more expansive definition of marriage?
• Will IRA administrators be required (or allowed) to seek proof of a legal marriage relationship for purposes of beneficiary designations, spousal consents, RMDs computed using joint life expectancy, or availability of spousal beneficiary distribution options?
• What kind of retroactive effect (if any) will the Supreme Court rulings create?

Regardless of your personal views, DOMA provided IRA trustees and custodians with a degree of certainty regarding the treatment of IRAs under federal law that, in light of the recent Supreme Court rulings, has given way to uncertainty. And, because the Supreme Court ruling invalidates only Section 3 of DOMA, which provided the definition of “spouse” and “marriage,” the rest of DOMA remains intact. Under Section 2 of DOMA, states are allowed to refuse to recognize the validity of same-sex marriages that were legally performed in other states. As a result, rather than relying on certainty under federal law in administering their IRA programs, IRA trustees and custodians now face the complexity and uncertainty that results from a cumbersome patchwork of conflicting state laws that apply in one state but that may not apply in another state.

These and a host of other IRA issues will need to be addressed in the coming weeks and months. Certainly some relief will have to be granted while we wait for transitional guidance. Credit unions that offer IRAs to their members would be well-advised to consult with their legal counsel and be prepared to make changes to their IRA processes and procedures as further guidance is issued.