On August 29, 2013, the Treasury Department ("Treasury") and Internal Revenue Service ("IRS") jointly issued guidance in Revenue Ruling 2013-17, 2013-38 IRB, and two accompanying sets of Frequently Asked Questions (together, the "Ruling"). The Ruling answers some (but not all) questions raised by the U.S. Supreme Court's landmark decision in United States v. Windsor, 570 U.S. ___, 133 S. Ct 2675 (2013), as it applies to federal taxes and, specifically, to employee benefits. In our Client Alert entitled "The Supreme Court Strikes Down DOMA—Benefit Plan Sponsors Have Much to Consider," we discussed the Supreme Court's decision, which found Section 3 of the Defense of Marriage Act ("DOMA") unconstitutional. The Supreme Court's ruling meant that, for purposes of federal law, legal same-sex marriages (under state or foreign law) must be recognized on the same terms as an opposite-sex marriage. Since that decision, employers, among others, have been waiting for guidance from the U.S. government on how to deal with the myriad issues raised by the effective repeal of DOMA, which impacted a vast number of federal laws, including important tax rules. By releasing the Ruling, the Treasury and IRS have addressed a number of the tax issues that are important for administering employee benefit plans. Although the government's position stated in the Ruling is broad, significant issues still remain and will need to be addressed in further guidance.
Perhaps the most significant effect of the Ruling is that it provides the following answers to three fundamental issues that have concerned employers and affected plan participants:
- The Ruling clarifies that a same-sex marriage entered into in a state (which includes a foreign jurisdiction) that legally recognizes that marriage (the so-called "state of celebration") will determine whether the marriage is recognized for federal tax purposes, even if the state where the couple resides does not recognize same-sex marriage. Therefore, if a same-sex couple is married in one of the states (and the District of Columbia) or a foreign country that recognizes same-sex marriage, then the marriage will be recognized for federal tax purposes, no matter where the couple may live or work.
- The Ruling indicates that persons in domestic partnerships, civil unions, or other similar arrangements under state law will not be recognized as married for federal tax purposes and, therefore, will not be accorded the same benefits as same-sex couples.
- The Ruling provides some particular guidance on how employers and plan participants can apply for refunds for certain taxes that they have already paid because the same-sex marriage was not previously permitted to be recognized. The Ruling is effective September 16, 2013, but employers and legally married same-sex couples may rely on the effect of the guidance now to file amended returns for prior years or make claims for overpayments of tax for those periods for which the statute of limitations has not expired.
The Ruling provides the following specific guidance to sponsors of group health plans and qualified retirement plans (including 401(k) and pension plans):
- Health Plans
- If an employer provided health coverage to a same-sex spouse and included the value of that coverage in the employee's gross income, the employee can file an amended return and recover federal tax paid on the value of the health coverage of the employee's spouse.
- If an employer sponsored a cafeteria plan that allowed employees to pay premiums for health coverage on a pre-tax basis, a participating employee may file an amended return and recover taxes paid on an after-tax basis for the employee's same-sex spouse.
- In the situations described above, the employer may claim a refund for the Social Security taxes and Medicare taxes paid on such benefits, even if the employer is unable to locate a former employee who received such benefits. A special procedure for employers to file claims for refunds or make adjustments will be provided in future guidance.
- The above applies only for years where the statute of limitations is still open, which is generally the previous three years, e.g., 2010, 2011, and 2012.
- In the situations above, an employer may not claim a refund of over-withheld income tax for prior years (although, as described above, the employee may do so for "open" years). An employer may make adjustments for over-withheld income taxes in the current year provided the employee is reimbursed by the end of the year.
- Qualified Retirement Plans
- A qualified retirement plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the plan participant lives or works in a jurisdiction that does not recognize the validity of same-sex marriages.
- A qualified retirement plan must treat a same-sex spouse as a spouse for all federal tax purposes, including paying the death benefit payable on a 401(k) plan or the qualified pre-retirement or qualified joint and survivor annuity (QPSA/QJSA) to the same-sex spouse, unless the same-sex spouse has waived his or her rights in accordance with spousal consent procedures applicable to same-sex spouses.
- As with the other provisions of the Ruling, qualified retirement plans must comply with the guidance as of September 16, 2013. However, what remains unanswered is the retroactive application of the Windsor decision to qualified retirement plans and other tax-favored retirement arrangements. The IRS is expected to issue future guidance on plan amendment requirements (including the timing of any required amendments) and any necessary corrections relating to plan administration.
As indicated above, the Ruling is certainly not the last word on how the Windsor decision will affect employee benefit plans. Further guidance may also come from other agencies on certain issues under their jurisdiction. The Ruling does not affect treatment of same-sex spouses under any state or local laws.
Employers generally should review their plans and programs and adjust their administration, including their tax-withholding as to health benefits and cafeteria plans. It will also be important to establish procedures, if none yet exist, to identify employees who are same-sex spouses who were legally married in any jurisdiction.
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The guidance is a helpful start for employers and plan administrators to make some of the changes needed in response to the Windsor decision. While we have answers on adjustments needed to group health plan administration, we still are not clear on the retroactive application of same-sex spouses' rights to retirement plan benefits. We will keep you advised as we learn more.