UPDATE – State of Celebration Governs Same-Sex Marriage for Federal Tax Purposes

Following the Supreme Court’s June 26, 2013, landmark ruling in Windsor v. United States, a number of implications remained unsettled, including whether the Internal Revenue Service (IRS) would treat same-sex couples as married for federal tax purposes based on their state of residency or based on the jurisdiction in which the marriage took place. On Aug. 29, 2013, the IRS issued Revenue Ruling 2013-17 and associated FAQs, confirming that same-sex couples, legally married in states or foreign countries that recognize same-sex marriage, will be treated as married for federal tax purposes, regardless of where they reside.

This advisory summarizes the IRS’ position and includes action items for plan sponsors. For a detailed analysis of Windsor’s impact on specific types of employee benefits, please read our June 28, 2013 advisory. We will also be providing a comprehensive overview of recent changes to benefit plans at our annual employee benefits seminar on Sept. 24.

What Do Revenue Ruling 2013-17 and the Associated FAQs Say About Same-Sex Spouses?

It is now clear that all employers must recognize same-sex marriages legally celebrated in a state permitting same-sex marriage¹, or in a U.S. territory or foreign country that recognizes same-sex marriage, for all federal tax purposes. The IRS confirmed:

• The terms “spouse,” “husband and wife,” “husband” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state or foreign law, and “marriage” includes a marriage between individuals of the same-sex.
• Same-sex couples, legally married in a domestic or foreign jurisdiction that authorizes same-sex marriage, will be treated as married for federal tax purposes regardless of where they are domiciled.

What About Couples Who Have Entered into a Registered Domestic Partnership or Civil Union?

For federal tax purposes, the IRS ruled that the term “marriage” does not include registered domestic partnerships, civil unions, or other similar formal relationships recognized under state law that are not denominated as a marriage under state law. Therefore their tax status has not changed. Although an employer may choose to extend benefits to same or opposite-sex domestic or civil union partners, employers are not required to do so. See the discussion of civil unions and domestic partnerships below under action items, and refer to our previous advisories for a discussion of the tax consequences of providing benefits to domestic partners and civil union partners.

What Does “All Federal Tax Purposes” Mean?

Under Revenue Ruling 2013-17, same-sex couples will be treated as married for all federal tax purposes. This means that a same-sex couple will be treated as married under any federal tax provision where marriage is a factor (i.e., where the terms “spouse,” “marriage,” or “husband and wife” are used). Such provisions include filing status, personal and dependency exemptions, standard deductions, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.  

How Does an Employee Recover Federal Income Tax Already Paid for Same-Sex Spouse Health Coverage for the Current Year?

Employers may make adjustments for income tax withholding that was overwithheld from an employee in the current year, but only if the employer repays or reimburses the employee for the overwithheld income tax before Dec. 31, 2013.

How Does an Employee Recover Federal Income Tax Already Paid for Same-Sex Spouse Health Coverage for Prior Years?

Prior to Windsor, employers had to impute income for employer-funded same-sex spouse health coverage by including the value of that coverage in the employee’s gross income in Box 1 of Form W-2, and also had to permit employees to pay after-tax outside of the employer’s cafeteria plan for their share of the cost of coverage for their same-sex spouse.

To recover taxes paid on both imputed income and after-tax payments, the employee may file an amended Form 1040 with the IRS for open tax years (generally 2010, 2011, and 2012 (and also 2009 if preserved through protective filings this past April)). The amendment would be to exclude the value of the same-sex spouse’s employer-funded coverage and the cost of after-tax coverage from Box 1 of Form W-2.

Employers are not permitted to make claims for refunds of overwithheld income tax for prior years.

Can an Employer Claim a Refund of, or Make Adjustments for, Any Excess Social Security and Medicare Taxes?

Yes, but only if the period of limitations for filing a claim for refund is open. The IRS will provide future guidance on a special administrative procedure for employers to file claims for refunds or make adjustments for excess social security taxes and Medicare taxes paid on same-sex spouse benefits. See also the Instructions for Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for more details.

When is Revenue Ruling 2013-17 Effective?

Prospectively as of Sept. 16, 2013, for all employee benefit plans. This means that as of Sept. 16, 2013, all qualified plans must treat same-sex spouses the same as opposite-sex spouses for all qualified plan purposes, including spousal consents and notices, and survivor benefits.

Retroactively with respect to any employee benefit plan or any benefit provided thereunder for purposes of filing original returns, amended returns, or claims for credit or refund of an overpayment of income or employment tax with respect to employer-provided health coverage benefits or fringe benefits that were provided by the employer and excludible from income based on an individual’s marital status. As discussed above, refunds are limited to open tax years.

We await guidance from the IRS on the application of Windsor to qualified retirement plans for periods before Sept. 16, 2013. The IRS has indicated that this guidance will also address plan amendment requirements and plan operation corrections.

What Action Should an Employer Take Now?

Plan sponsors should ensure that all plan documents and employee communications are drafted to reflect that same-sex spouses are treated identically to opposite-sex spouses for federal tax purposes.

Specific action items include:

• Check definitions in employee benefit plans. Consider whether the definitions are limited to opposite-sex spouses and whether they should be revised to include same-sex spouses. Employers should review all plans, including qualified plans, health and welfare plans, and cafeteria plans.
• Check beneficiary designations and distribution options in qualified plans. The IRS has indicated that a plan must treat a same-sex spouse as a spouse for purposes of satisfying federal tax laws relating to qualified retirement plans. Distribution options in qualified plans often require spousal consent. After Sept. 16, 2013, consent of the same-sex spouse must be obtained when spousal consent is required.
• Recognition of civil unions and domestic partnerships. Plan sponsors should decide how the plan will treat civil unions or domestic partnerships. If the welfare plan already offers benefits to same-sex domestic or civil partners, will the plan continue to recognize civil unions or domestic partnerships or will it recognize only valid marriages? In the qualified plan area, a spouse cannot be defined to encompass civil union or domestic partners.
• Review tax treatment of benefits. For federal tax purposes, stop imputing federal income tax to same-sex spouses and consider refunding any income tax and FICA withholding prior to the end of the 2013 calendar year. State tax treatment will vary based on state law. Confirm that the tax treatment and general administration of various benefit arrangements are consistent with plan documents and the new law. Consult with payroll to ensure that same-sex spouse benefits are provided pre-tax.
• Claim refunds of excess social security and Medicare taxes. Decide whether to make such claims for open tax years. The IRS will issue additional guidance on this, but in the interim employers should review IRS Notice 2013-8.
• Prepare for questions. Prepare for questions from employees regarding filing amended tax returns.
• Employee communications. Revise employee handbooks, participant communications and internal policies to reflect that “spouse” now includes “same-sex spouse.”

FOOTNOTE