Yesterday afternoon the IRS issued its initial round of substantive guidance regarding the impact of the Supreme Court’s June 26, 2013 decision in United States v. Windsor striking down section 3 of the Defense of Marriage Act, which previously had prohibited recognition of same-sex marriages in the application of federal laws. The guidance consists of Revenue Ruling 2013-17 (the “Revenue Ruling”) and a related set of answers to frequently asked questions (“FAQs”).
General Rule: Recognition of Same-Sex Marriage Based on Jurisdiction of Celebration. For federal tax purposes the IRS will recognize a marriage of same-sex individuals legally entered into in a state whose laws authorize the marriage of two individuals of the same sex, even if the state in which they live does not recognize the validity of same-sex marriages. Thus, for example, if a couple enters into a valid same-sex marriage in Massachusetts and then moves to Ohio (where same-sex marriages are not recognized), the couple will be viewed as married for federal tax purposes. This approach is commonly referred to as the “state of celebration” approach. For purposes of the guidance, a “state” includes any domestic or foreign jurisdiction having the legal authority to sanction marriages. Consequently, a same-sex couple married under the laws of another nation who moves to the U.S. will be considered to be married for U.S. federal tax purposes, regardless of where they reside while in the U.S. The rationale for utilizing a state of celebration rule, as opposed to a state of residence rule, for determining the validity of a same-sex marriage was due in part to the serious administrative concerns that would be generated for the IRS, taxpayers and employers if the marital status of a same-sex couple could change any time either or both of the members moved to another jurisdiction. For employers that operate in multiple jurisdictions, this is probably the most practical resolution that could have been hoped for on this question. The guidance further indicates that individuals (opposite sex or same sex) who are in registered domestic partnerships, civil unions, or other similar formal relationships will not be recognized as married for federal tax purposes.
Applicability. The guidance is applicable for all federal tax purposes including the employee benefit plan provisions of the Internal Revenue Code. Thus, as specifically noted in the guidance, it impacts the application of the rules for qualified plan rules (such as those related to survivor rights and benefit elections) and welfare plans (such as with respect to exclusion of income related to medical coverage of spouses). The guidance is not applicable for purposes of other laws for which other agencies, such as the Department of Labor, are responsible. The other agencies should be issuing guidance with respect to those laws in the near future. The Department of Labor, IRS, Treasury Department and Pension Benefit Guaranty Corporation share regulatory authority with respect to ERISA, with many of the ERISA Title I provisions having parallel provisions in the Internal Revenue Code. Therefore, it would seem likely that further guidance will provide that the “state of celebration” approach set forth in the Revenue Ruling and FAQs will also apply for ERISA purposes, generally.
Effective Date. Employers and plans should comply with the new guidance effective September 16, 2013. This gives plans only a little more than two weeks to revise administrative processes and systems (although relief for correcting errors thereafter is anticipated, as noted below).
Plan Amendments. Further guidance will be forthcoming regarding how rapidly plan amendments must be adopted, but the IRS anticipates that employers will be provided “sufficient time” to adopt such amendments.
Retroactivity. Further guidance on the retroactive application of the Supreme Court’s decision in Windsor with respect to employee benefits will be forthcoming. The guidance is “to take into account the potential consequences of retroactive application to plans, plan sponsors, employees and beneficiaries” and further states that it is anticipated that “the future guidance provide sufficient time for . . . any necessary corrections so that the plan and benefits will retain favorable tax treatment for which they otherwise qualify.”
Tax Refunds. Despite the generally prospective application of the Revenue Ruling, affected taxpayers are permitted to rely on the guidance for the purpose of filing original, amended or adjusted returns and making claims for credit or refunds for overpayment of taxes for 2013 and prior periods resulting from the new rules, provided the applicable statute of limitations for filing the claims has not expired. (Generally, the statute of limitations expires the later of three years after filing the return or two years after payment of the taxes involved). With respect to employee benefit plans, this retroactive relief applies only where the filing or refund claim relates to overpayment of tax concerning employment or income taxes with respect to employer-provided coverage benefits or fringe benefits that in retrospect should have been excluded from income under Sections 106 (health coverage), 117(d) (qualified tuition reduction), 119 (meals and lodging), 129 (dependent care), 132 (certain fringe benefits) or treating an amount contributed under Section 125 for coverage of a same-sex spouse as a pre-tax salary reduction amount. For example, as a result of this relief, employees will be permitted to file for refunds with respect to income and employment taxes on income imputed for medical coverage provided to their same-sex spouses. Similarly, employers will be permitted to file for refunds with respect to the employer share of employment taxes on that imputed income. The IRS will provide a special administrative procedure in the near future for employers to file such claims for refunds.
2013 Health Coverage. Same-sex spouse coverage will not cause imputed income for 2013. Employers are not to impute income for same-sex spouse coverage on or after September 16, 2013, but likely have already calculated and withheld income tax based on the imputed income for the period prior to this date. Employers may make adjustments for income tax withholding from an employee in the current year provided the employer repays or reimburses the employee for over-withheld income tax before the end of the calendar year. If the employer does not make these adjustments, it appears that the employer will report the total income tax withholding including that relating to imputed income prior to September 16, 2013, and the employee will use this amount as withheld taxes in completing his or her 2013 federal income tax return. Since the employee will not have to recognize the imputed income for 2013, the excess taxes either will be refunded to the employee or will reduce any other taxes owed. We expect further guidance on this issue and on excess social security and Medicare withholding.
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