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IRS Notice Provides Mid-Year Amendments to Safe Harbor 401(K) & 401(M) Plans to Reflect Impact of Windsor Case

Notice 2014-37, 2014-23 IRB. In a Notice, IRS has stated that a plan will not fail to satisfy the requirements to be a Code Sec. 401(k) or Code Sec. 401(m) safe harbor plan merely because the plan sponsor adopts a mid-year amendment pursuant to a recent IRS notice that required amendments to plans to reflect the Supreme Court’s striking down of provisions of the Defense of Marriage Act (DOMA) in Windsor .

Background on safe harbor 401(k), etc. plans. For a cash or deferred arrangement (CODA, i.e., a 401(k) plan) to be qualified, elective contributions must satisfy either the actual deferral percentage (ADP) nondiscrimination test or one of the design-based alternatives in Code Sec. 401(k)(11), Code Sec. 401(k)(12), or Code Sec. 401(k)(13). Code Sec. 401(k)(12) and Code Sec. 401(k)(13) provide design-based safe harbor methods under which a CODA is treated as satisfying the ADP test if the arrangement meets certain contribution and notice requirements.

Under Reg. § 1.401(k)-3(e)(1), a Code Sec. 401(k) safe harbor plan must be adopted before the beginning of the plan year and be maintained throughout a full 12-month plan year, except as otherwise provided in Reg. § 1.401(k)-3(g) (relating to the reduction or suspension of safe harbor contributions) or in guidance of general applicability published in the Internal Revenue Bulletin. Under Reg. § 1.401(m)-3(f)(1), similar rules apply to Code Sec. 401(m) (employee contribution/employer matching contribution) safe harbor plans, including Code Sec. 403(b) (tax-exempt organization, etc.) plans.

Background on DOMA, Windsor, and previous IRS guidance on Windsor. In ’96, Congress enacted, and President Clinton signed into law, DOMA. Section 3 of DOMA defined marriage for purposes of administering federal law as the “legal union between one man and one woman as husband and wife.” It further defined “spouse” as “a person of the opposite sex who is a husband or wife.” As a result, same-sex spouses weren’t recognized for purposes of the Code with respect to qualified retirement plans.

In U.S. v. Windsor, et al, (Sup Ct 2013) 111 AFTR 2d 2013-2385, the Supreme Court struck down section 3 of DOMA as an unconstitutional deprivation of equal protection.

Following the Court’s decision, IRS issued guidance explaining the Federal tax implications of the Windsor decision. In Rev Rul 2013-17, 2013-38 IRB 201, IRS stated that same-sex couples who were legally married in jurisdictions that recognize their marriage will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes same-sex marriage.

In Notice 2014-19, 2014-17 IRB, IRS provided guidance on the effect of the Windsordecision on qualified retirement plans and plan amendments. This guidance provided that the deadline to adopt a plan amendment pursuant to Notice 2014-19 generally was the later of (i) the otherwise applicable deadline under Rev Proc 2007-44, Sec. 5.05 or its successor; or (ii) Dec. 31, 2014. However, in the case of a governmental plan, any amendment made pursuant to Notice 2014-19 didn’t need to 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. (Notice 2014-19, Q&A 8)

IRS OKs mid-year amendments to safe harbor 401(k), etc. plans. IRS has now stated that a plan will not fail to satisfy the requirements to be a Code Sec. 401(k) or Code Sec. 401(m) safe harbor plan merely because the plan sponsor adopts a mid-year amendment pursuant to Notice 2014-19, Q&A 8.

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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