Following the United States Supreme Court decision in United States v. Windsor, the Internal Revenue Service (IRS) has issued guidance on how that decision impacts the Internal Revenue Code. The guidance was released in Revenue Ruling 2013-17 and an accompanying set of Frequently Asked Questions (FAQs).
Background on the Supreme Court’s Decision
As background, Section 3 of The Defense of Marriage Act (DOMA) provided that the word “marriage” meant only a legal union between one man and one woman as husband and wife, and the word “spouse” referred only to a person of the opposite sex who is a husband or a wife. In Windsor, the Court held that Section 3 of DOMA was unconstitutional. Thus, following Windsor, for most benefit plans, same-sex marriages will be treated the same as opposite-sex marriages, and the terms “spouse,” “husband,” “wife,” “married” and “marriage” must now include lawfully married same-sex individuals. Although the Court in Windsor did not provide any insight as to how that decision may impact various aspects of the tax code and other federal laws, the IRS guidance has helped clarify how it applies to certain aspects of the tax code.
The IRS’ Guidance and Its Implications on Employee Benefits
The IRS guidance provides that, for purposes of determining whether a person is a "spouse," it will look to whether the marriage was valid under the laws of the state where the marriage was entered into rather than the state in which the parties may reside. Thus, if an employee enters into a same-sex marriage in a state that recognizes the marriage as valid (e.g., New York), the employer must treat that couple as married for benefit plan purposes even if they subsequently move to a state where the marriage would not be recognized as valid.
It is important to note that the IRS guidance provides 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. This means that benefit plan administrators will need to distinguish between same-sex couples in domestic partner relationships (and other formal relationships) and those in marriages recognized under state law.
Qualified retirement plans must now treat a same-sex spouse as a “spouse” for all plan purposes. Thus, same-sex spouses will be afforded Qualified Joint And Survivor Annuity (QJSA) and death benefit protections. For couples who intend that someone other than the spouse receives death benefits, this will now require spousal consent.
Under the IRS guidance, an employee can file an amended tax return to claim a refund of the federal income tax previously paid on any imputed income reported on an employee’s Form W-2 for the value of health coverage provided to the employee’s same-sex spouse. In addition, employees may recover income taxes related to the payment of employee premiums that were made on an after-tax basis (assuming the employer maintains a cafeteria plan that would have permitted the premiums to be paid on a pre-tax basis). Claims for refunds can only be made with respect to open tax years. Accordingly, refund claims must generally be made by the later of three years from the date the original tax-year return was filed or two years from the date the tax was paid.
Employers may claim a refund for the Social Security taxes and Medicare taxes withheld and paid on previously provided health plan coverage for all open tax years. We expect the IRS will issue additional guidance addressing the administrative procedure for employers to use to file claims for adjustments as the result of same-sex spouse benefits in the near future. Employees may claim refunds of Social Security taxes and Medicare taxes in the event the employer chooses not to pursue a refund.
Employers cannot make claims for refunds of excess withholding of income taxes for prior years. However, they are permitted to make adjustments for excess amounts withheld from an employee in 2013.
The IRS guidance applies prospectively as of September 16, 2013. However, as noted, employees and employers may file for refunds for open tax years for taxes relating to health plan coverage.
Many of the questions regarding the impact of Windsor on employee benefit plans remain open, including the effect, if any, on retirement plans for periods before September 16, 2013. However, the recently released Revenue Ruling and FAQs provide a good start on some key issues and the IRS has promised further guidance.