New guidance addresses “celebration rule” but some payroll issues remain ambiguous.
The Internal Revenue Service has issued its initial guidance regarding retirement and welfare benefits for employees with same-sex spouses.1 Although the guidance answers some basics, a number of open issues still need to be resolved.
Look to the State of Marriage
For federal tax purposes, a couple is married if the marriage was valid in the place in which the marriage was entered into, regardless of whether the state in which such individuals reside recognizes that marriage. This “rule of celebration” (as opposed to a “rule of domicile,” which would look instead to the law of the married person’s state of residence to determine if the marriage is valid) aligns tax treatment for same-sex and opposite-sex couples on the federal level. However, to the extent that a married employee’s state of residence does not recognize the marriage, employers must still follow state law for state tax purposes, while applying the rule of celebration for federal tax purposes. As a result, complexity for payroll purposes will continue.
Only Married Couples Receive Federal Relief
As expected, federal recognition only applies to married couples and does not impact other types of couples, such as those in a civil union, a registered domestic partnership or similar relationship. Some of these other forms of legal relationships, however, may still receive beneficial treatment under applicable state law. Employers need to be aware of these other relationships in order to comply with state requirements.
New Rule Applies to Medical Plans for Entire Year
To the extent that a married same-sex couple received medical plan benefits under an employer’s plan and the coverage was subject to federal tax, the employee can apply for refunds for prior tax years that remain open under the statute of limitations. Correspondingly, the employer may also apply for a refund with respect to the employer portion of any employment taxes paid on such benefits. To the extent that the same-sex spouse has coverage in 2013, the employer’s share of the premium should not be imputed income to the employee subject to federal income tax in 2013. Employees may also now make pre-tax premium payments for the employer-provided coverage of a same-sex spouse. Employers can make adjustments to future wage withholdings for any excess withholding of taxes that has already occurred in 2013.
Effective September 16, 2013 for Qualified Retirement Plans
Presumably to give employers additional time to adjust, qualified retirement plans are not required to recognize same-sex spouses as spouses until September 16, 2013. The Internal Revenue Service may address the pre-September 16, 2013 period in future guidance.
In order to properly administer their plans and address tax issues, employers need to know the nature of their employees’ relationships (marriage, civil union, registered domestic partner or something less formal). Although employers can collect this information in connection with open enrollment for 2014, employers should have the information for 2013 as well, in order to ensure that they issue 2013 Forms W-2 correctly.