The U.S. Supreme Court’s decision in U.S. v. Windsor changed the tax treatment of benefits provided to legally married same-sex spouses and their dependents. Prior to the Windsor decision, employers were required to treat any employer contributions for benefits offered to an employee’s same-sex spouse as imputed income. The IRS previously advised that effective Sept. 16, 2013, benefits provided to same-sex spouses under medical, cafeteria, and other fringe benefit plans are now entitled to the same favorable tax treatment as opposite-sex spouses, and refunds may be available for prior years.
On Sept. 23, 2013, the IRS issued further guidance in Notice 2013-61, describing a special administrative procedure for employers to file claims for refunds or make adjustments for over-withheld income taxes and excess employment taxes paid on same-sex spouse benefits. As a result of this guidance, employers should take the following action:
- First, employers should immediately stop imputing income tax and deducting FICA, FUTA, and income withholding taxes from the value of medical and fringe benefits provided to same-sex spouses and their dependents.
- Second, for plan year 2013, the employer should immediately take steps to recover the income tax, FICA, and FUTA taxes previously withheld. There are also less urgent steps to be taken to recover taxes for prior years.
There are two simplified methods set forth in Notice 2013-61 for recovering employment taxes (i.e. “FICA and FUTA”) and one method for recovering income taxes.
Approach One – Correct for 2013 in Current Year (Preferred Method)
Under approach one, the employer reimburses the employee for the over-withheld FICA and FUTA taxes and income taxes by reducing future tax payments for 2013 by the amount over-withheld. Reimbursement or repayment must be completed by Dec. 31, 2013. The adjustment for FICA taxes is made only if the employee’s wages are projected to be less than $113,700 for the year. The adjustment for FUTA taxes and income taxes are made regardless of the total amount of the employee’s earnings. The reduced amounts withheld are reported on the employer’s semi-monthly or monthly payroll deposits and will also be reported on the 4th Quarter Form 941, due by Jan. 31, 2014. Under this approach, all accounts are reconciled by year-end, so there are no special reports or employee consents required. This is the only method by which the employer can assist the employee with respect to the over-withheld income tax.
Approach Two – Correct for 2013 After Year-End (Requires amended returns and employee consent)
Under this approach, the employer stops imputing income, but has not fully corrected the over-withholding of FICA (for those earning less than $113,700) and the over-withholding of FUTA and income tax by year-end. The employer cannot assist the employee with the over-withholding of income tax after year-end. The employee may claim an income tax refund on his or her 2013 tax return. The employer can obtain the over-withheld FICA and FUTA by filing amended returns along with a signed statement from the employee. The employee’s statement must indicate that the employee has not and will not, in the future, file a claim for a refund of the FICA and FUTA taxes. Prior to filing, the employer must reimburse the employee for the employee’s share of over-withheld FICA or FUTA taxes. The employer would then issue a corrected W-2 to the employee, i.e. form W-2c. The employer would also file an amended Form 941-X, for the fourth quarter, with the words WINDSOR written across the top. This is a simplified procedure, as normally the employer would be required to file an amended Form 941-X for each quarter of 2013.
Correction of Other Open Years
The IRS has indicated that the employee and employer can file retroactively for all open years, i.e. generally 2010 and later years. However, an employee who files retroactively for income tax refunds must amend and file the prior Form 1040 returns consistent with such status, i.e. married. Employers who file retroactively to recover FICA and FUTA must obtain a written statement/consent from the employee and must refund the employee’s share of over-withheld FICA and FUTA to the employee prior to filing. The employer must file an amended Form W-2, W-2c, and file an amended Form 941, i.e. a 941-X. The employer can file an amended Form 941-X for the last quarter of the year and seek a refund for the entire year. An amended fourth quarter Form 941-X must be filed for each year that the employer is seeking a refund. Absent this special procedure, the employer would have to file an amended Form 941-X for each quarter of the year.
Given the work involved in filing for open years, an employer may wish to correct only calendar year 2013, before Dec. 31, 2013, and await an employee request before filing for earlier years.