Is It Time To Institute A Refunding Bond / Release Agreement For Distributions From Qualified Plans?

Is It Time To Institute A Refunding Bond / Release Agreement For Distributions From Qualified Plans?

Is it time to institute a Refunding Bond/Release Agreement for distributions from qualified plans? When a participant in a qualified retirement program passes away, the plan trustees and plan administrator are required to adhere to the terms of the plan document when processing the distribution of the deceased participant’s benefits from the plan. Many, but not all, qualified retirement plans provide that a participant’s death benefits are to be paid to the participant’s surviving spouse (unless the surviving spouse waives his/her benefits under the plan). In the aftermath of the recent United States Supreme Court decision concerning same-sex marriages in United States v. Windsor, (“Windsor”), trustees/plan administrators of a qualified retirement plan when the spouse is the mandated beneficiary are facing the possibility of distributing funds to the wrong plan beneficiary (which could subject the Plan to the possibility of having to make a second distribution to another beneficiary).

To illustrate this possible scenario, let’s use Harry, a participant in a defined benefit plan (“Plan”), who separated from service with his employer at age 50. The beneficiary designation form on file with Harry’s former employer designated his children from his first marriage as the beneficiaries of his benefits under the Plan. At age 62, while living in New Jersey, Harry enters into a New Jersey civil union with Sal. Five years later, Harry and Sal move to New York where Harry dies. After Harry’s death, one of his children contacts the Plan administrator and requests the distribution of Harry’s death benefits under the Plan. Adhering to the terms of Harry’s Plan beneficiary designation form, the trustee/Plan administrator pays the Plan’s death benefits to Harry’s children.

The following year, Sal contacts the Plan administrator and states that as the civil union partner of Harry, he believes he is entitled to the survivor benefit under the Plan (instead of Harry’s children). Unfortunately, Sal is not entitled to the survivor benefit under Harry’s Plan since Revenue Ruling 2013-17 issued by the Internal Revenue Service as a result of the Windsor decision provides that only the surviving partner of a couple married in a venue that recognized same-sex marriages can receive qualified retirement plan survivor benefits as a spouse. New Jersey does not currently permit same-sex marriages and, for federal purposes, a civil union is not treated the same as a marriage.*

A simple solution may have been for Harry and Sal to renew their vows and get married in New York (which currently allows for same-sex marriages). Even if Harry and Sal had formally married in New York, that may not have been taken into consideration to insure that the death benefits under the Plan were not paid to Harry’s children.

If Harry and Sal had been married in New York at the time of Harry’s death and were living in New York, the death certificate would have stated they were legally married and Sal would have then been entitled to receive the Plan’s death benefits as Harry’s surviving spouse. However, there are multiple States that refuse to recognize the legality of same-sex marriages (even if the marriage is valid in the state where the marriage was performed) and as such, the death certificate may not reflect that Harry was married. If Harry and Sal had moved to Virginia three years before Harry’s death (a State that does not recognize same-sex marriages), the death certificate issued in Virginia (under present methods) would not reflect Harry and Sal were married and the trustee/Plan administrator may not have knowledge that Harry and Sal were legally married in New York and processed the children’s death benefits request.

One possible way to remedy this situation (other than have some sort of national database) is to revise the procedures used by trustee/Plan administrators in processing death benefit distributions (or for that matter, all distributions) from qualified plans. In many States, before an individual receives an inheritance, they are asked by the Estate to execute a Refunding Bond/Release. This form states (in part) that if additional taxes are owed by the Estate, the beneficiary agrees to refund to the Estate the amount of taxes necessary for his/her proportionate share. Perhaps qualified retirement plans should adopt a similar type of agreement prior to making distributions to non-spousal beneficiaries.

The implications of the Windsor decision are far reaching and are still to be determined. Plans are becoming more difficult to administer and as such, maybe it is time to implement an additional form of protection that may help alleviate costly litigation expenses or prevent the possibility of a plan having to pay, or being asked to pay, the same benefit twice.

* It should be noted that New Jersey may soon change its law on same-sex marriages as a result of a recent Superior Court ruling that permits same-sex marriages and rules that such marriages should commence October 21, 2013. As of this writing, the Superior Court has denied the State’s request to delay implementation of same-sex marriages in New Jersey while the State appeals the lower court’s decision to the New Jersey Supreme Court. The New Jersey Supreme Court has granted certification in the case and is scheduled to hear oral arguments in the matter in January, 2014.