The Internal Revenue Service (“IRS”) recently issued Notice 2013-61 (the “Notice”), which explains the procedures for employers and employees seeking claims for refunds or adjustments of overpayments of Federal Insurance Contributions Act (“FICA”) taxes and federal income tax on income imputed as a result of an employee’s same-sex spouse receiving benefits under an employer’s medical and welfare benefit plans.
Earlier this year, in United States v. Windsor, the United States Supreme Court struck down the portion of the Defense of Marriage Act (“DOMA”) defining “marriage” as exclusively the union between a man and a woman and “spouse” as a person who is married to someone of the opposite sex, which we posted about here. Following Windsor, the IRS issued Revenue Ruling 2013-17, which provided that legally married same-sex spouses will be considered married for federal tax purposes. We posted about this Ruling here and here. The Notice is the next installment of guidance regarding the tax implications of the Windsor decision.
The Notice provides employers streamlined administrative procedures for correcting the FICA and federal income tax overpayments by reducing the number of filings to be made to the IRS. Under the IRS’ general procedures an employer seeking a return or claim for refund must file an Adjusted Employer’s Quarterly Federal Tax Return (Form 941-X) for each calendar quarter for which such return or claim is sought. The Notice distinguishes between overpayments made during 2013, and overpayments made in prior years. An employer is not required to follow the Notice. Instead, Employers may rely on the existing general procedures for correcting overpayments, or decide not to correct.
There are two optional administrative procedures for correcting overpayments made during 2013. Under the first alternative:
- An employer must repay or reimburse employees by December 31, 2013 for their portion of the FICA and the federal income tax collected from their pay for the cost of covering their same-sex spouse, if any, during the first three quarters of 2013.
- The employer may then reduce the fourth quarter wages, tips and other compensation reported on its Employer’s Quarterly Federal Tax Return (Form 941) by the amount that was treated as wages for the first three quarters. However, the FICA adjustments can only be made to the extent that the imputed income, together with other wages, do not exceed $113,700 (the maximum amount of wages subject to FICA or 2013). Note, no third quarter adjustment will be required if any overpayments withheld during the third quarter are repaid or reimbursed to the affected employees by October 31, 2013.
An employer utilizing this alternative will be relieved from the general procedures’ requirement to file separate Forms 941-X for each of the first three quarters of 2013.
The second alternative permits employers to defer corrections into a later year. In this instance:
- The employer must file its Form 941 for the fourth quarter of 2013 without any adjustments.
- Thereafter, the employer should file a Form 941-X (marked “WINDSOR” in dark, bold letters on the first page of the form) for the fourth quarter of 2013 to make adjustments for the entire year. In general, a Form 941-X is due within 3 years of the date the Form 941 was filed or 2 years from the date the employer paid the tax reported on Form 941, whichever is later.
- However, to use this alternative, the employer will need to comply with the other requirements under the general procedures. These include, in general, repaying or reimbursing the employees for their portion of the overcollected FICA amounts and obtaining the employees’ written confirmation that they have not made a previous claim and will not make a future claim for refund or credit. As an alternative to repaying or reimbursing the employees, the employer can seek the employees’ consent to obtaining the refund. In addition, the employer may need to file corrected wage and tax statements for the affected employees (Form W-2c).
Note there is no correction method for income tax withholdings corrected in a subsequent year. As such, employees would have to seek any refunds through the filing of their individual income tax returns for 2013.
Prior to 2013
For years prior to 2013, an employer may file a Form 941-X (marked “WINDSOR” in dark, bold letters on the first page of the form) for the fourth quarter of any prior year in which the statute of limitations has not expired and include any adjustments or refunds for overpayments of employment taxes with respect to same-sex spouse benefits during that year. Essentially, this procedure is the same as the second alternative for 2013, including the filing of Forms W-2c, repaying or reimbursing the overcollected FICA tax to employees and obtaining the employees’ written statement confirming that the employee has not made a previous claim and will not make a future claim for refund or credit of the overcollected amounts. Note the adjustments for prior years must take into account the taxable wage base for the applicable year.
Similarly, there is no correction method for the income tax withholdings. Instead employees seeking refunds of income tax paid with respect to same-sex benefits would need to file an amended income tax return (Form 1040X). The information provided in the Form W-2c should assist employees in this regard.