by Denise Appleby, CISP, CRC, CRPS, CRSP, APA
The tax code provides several special benefits for spouses. These include being able to fund retirement accounts as well as the ability to be named as beneficiary on retirement accounts. In spite of these special provisions, a “same-sex”spouse can be deprived of benefits which are usually reserved for spouses. As a result, same sex couples must take extra precautions when making provisions for their spouses or partners.
‘Spouse’-by Definition- For Retirement Accounts
While same-sex couples can be married in some states, federal law extends certain provisions only to individuals who are considered married under the Federal Defense of Marriage Act (DOMA) . DOMA defines marriage as a legal union between one man and one woman for purposes of federal laws, including those that govern retirement accounts. As a result, retirement benefits and provisions that are available only to spouses may not be available to same sex married couples.
Same Sex Married Couples not Entitled to Certain Spousal Benefits
Because of the definition of marriage under DOMA , married couples who happen to be of the same gender may not be eligible for federally regulated retirement benefits and provisions that are available only to spouse beneficiaries. These benefits and provisions include the following:
oThe ‘Treat-as-Own’ Option for IRAs
If the retirement account is an IRA , it can be treated as the surviving spouse’s ‘own’ IRA. This ‘treat as own’ option allows the spouse beneficiary to stretch distributions from the IRA over a longer life expectancy period, if the IRA owner died before the required beginning date (RBD) and was older than the surviving spouse.
Assume Jim is 60-years old and his wife Sally is 10 years younger than he is. If Jim dies before Sally and she is the beneficiary of his IRA , Sally can either (a) take distributions over her life-expectancy on a recalculated basis or (b) treat the IRA as her own. If she treats it as her own, she can wait until she reaches age 70 ½ before she begins distributions, at which point the funds would be distributed using the Uniform table; or if she remarries and her new spouse is more than 10-years her junior, she can use the joint life expectancy table.
The treat-as-own-option is favorable for Sally if she wants to withdraw the least amount possible from the IRA. This allows for a larger amount to grow on a tax-deferred (or tax-free in the case of a Roth IRA) basis.
oDeferring RMDs Until the Decedent Would Have Reached Age 70 ½
If the retirement account owner dies before the RBD, and the surviving spouse chooses to keep the assets in an inherited IRA or within the qualified plan , 403(b) or governmental 457(b) plan in which the decedent was a participant , he/she need not begin to take beneficiary distributions until the year the decedent would have reached age 70 ½ .
oUsing the Joint Life Expectancy Tables to Calculate RMD Amounts
If the spouse of the retirement account owner is more than 10-years younger (than the owner), the joint life expectancy tables can be used to calculate required minimum distribution (RMD) amounts. This allows the account owner to take lower RMD amounts, than would be required if the Uniform Table was used.
oPreventing Others from Being Named as Beneficiary
Qualified plans and ERISA 403(b) plans usually provide that the spouse of the participant is the beneficiary by default. If the participant wants to name a party other than or in addition to his or her spouse as a primary beneficiary, that spouse’s consent must be obtained and must be properly witnessed. In some states, spousal consent must also be provided for IRAs and non-ERISA 403(b) accounts, if the owner wants to name another party as primary beneficiary on the account. This protects the beneficiary-status of the spouse, and ensures that he or she inherits the retirement assets if he or she survives the participant.
oBeing the Default Beneficiary of a Retirement Account
Plan documents usually include default provisions for determining who is the beneficiary in the event the retirement account owner did not name one, or in cases where the named beneficiary predeceased the retirement account owner and there is no contingent beneficiary. For qualified plans, the default beneficiary is usually the spouse of the retirement account owner, and many IRA agreements also default to the spouse. In cases where there is no surviving spouse, the default beneficiary may be the decedent’s estate or surviving children.
Note: This provision is governed by the plan document and not federal law. As such, whether a plan document includes provisions for same sex couples – such as making a same sex partner the default beneficiary- is at the discretion of the IRA custodian or the employer/plan administrator in the case of a qualified plan, 403(b) or governmental 457(b) plan.
oUsing a Spouse’s Income to Fund an IRA
If a spouse has little or no earned income/compensation, contributions can still be made to an IRA on their behalf, if the other spouse has sufficient income/compensation. For instance: assume Jim and Jane are married and Jim is a stay-at-home-dad who does not work outside of the home. Jim can make a contribution to his IRA, based on the income Jane receives from her job, providing the income is sufficient to cover the IRA contribution and they file a joint tax return. This provision allows a non-working spouse to fund his or her retirement account.
How Custodians and Plan Administrators Comply
Generally, Custodians and plan administrators are required to satisfy certain federally regulated requirements which govern retirement accounts. These can include calculating the RMD amount in certain cases and permitting spouse beneficiaries to treat inherited IRAs as their ‘own’. Plan administrators must also ensure that their qualified plans are operated in accordance with the terms of their plan documents so as to maintain the qualified status of the plan. One way of ensuring that they comply with these requirements is to use a gender indicator, which identifies the gender of the retirement account owner/participant and the gender of the beneficiary.
Conclusion: Options for Same Sex Couples
Where a provision is governed by federal regulations, except for lobbying for a change in the definition of marriage, same sex couples have no choice but to abide by those regulations. Alternately,where the provisions are governed only by the plan document and determined by the plan sponsor and Custodians, the decision makers can be petitioned to make changes that allow for the same treatment to mixed-gender as well as same sex married couples. See the article Five Retirement Planning Tips for Same-sex Couples for some tips on planning for retirement.