Earlier this summer, following the Supreme Court's issuance of the landmark case, United States v. Windsor, which held Section 3 of the Defense of Marriage Act (DOMA) to be unconstitutional, we published an Executive Alert identifying some of the ways in which the Court's decision would impact employers' benefit plans and policies. We noted that the Internal Revenue Service (IRS) was expected to provide guidance with regard to same-sex couples, reflecting the demise of the federal ban on the recognition of same-sex marriages. On August 29, 2013, the IRS issued its initial guidance in the form of Revenue Ruling 2013-17 and posted a series of Frequently Asked Questions and Answers (FAQs) on its website. This guidance answers a number of the questions facing employers with regard to their employee benefit plans but leaves some important issues yet to be decided. The ruling and the FAQs also highlight the need for employers and plan administrators to take certain actions now with regard to benefit plan administration.
IMPORTANT TAKE-AWAY FOR EMPLOYERS
The Revenue Ruling and the FAQs address a broad range of issues relating to the tax status of same-sex married couples. However, with regard to spousal rights under the employee benefit plans, and the tax treatment of employer-provided benefits for same-sex spouses, here are some key points:
- A same-sex couple's marital status is to be determined based upon the law of the state in which the marriage ceremony was performed, regardless of the taxpayer's state of residence or the place of employment. If the marriage ceremony is performed in a state or foreign country that recognizes same-sex marriages, the couple will be considered to be married for federal tax purposes, even if the couple resides in a state that does not recognize the validity of same-sex marriages.
- This determination is applicable for all federal tax purposes. While the issue before the Supreme Court in the Windsor case involved the marital deduction under the federal estate tax, the IRS has indicated that the recognition of same-sex marriages mandated by the Court's decision is applicable for all federal tax purposes. This will include an individual's tax return filing status, the tax treatment of employer-provided health and welfare benefits provided to same-sex spouses and spousal rights under tax-qualified retirement plans.
The IRS will begin applying this standard effective September 16, 2013.
- No retroactive application for retirement plans -- for now! For qualified retirement plans, the IRS position is not applicable to periods before September 16, 2013. However, the IRS has indicated that it will address in future guidance how the Windsor decision and the rules set forth in Revenue Ruling 2013-17 should be applied to qualified retirement plans for periods before September 16.
- Individuals may apply for refunds retroactively. Individuals may apply the IRS's standard retroactively to claim refunds for the overpayment of income tax resulting from imputed income on health plan coverage, certain employer-paid lodging and meals, qualified tuition reductions, dependent care assistance or fringe benefits provided to a same-sex spouse. Individuals can recoup excess tax payments by filing an amended tax return (Form 1040-X).
- After-tax premium payments may be treated as pre-tax. Individuals who paid for same-sex spousal coverage with after-tax dollars under a 125 cafeteria plan may also retroactively treat those payments as having been made on a pre-tax basis if employee coverage was paid for on a pre-tax basis.
- Recouping Employer's Overpayment of FICA and Medicare Tax. Employers will be able to recoup any Social Security and Medicare tax overpayments resulting from the imputed income on benefits provided to same-sex spouses. The IRS has indicated that it anticipates establishing an expedited program for the filing of Form 941-X for this purpose.
STILL UNANSWERED QUESTIONS
The IRS intends to issue further guidance on the retroactive application of the Windsor decision to other employee benefits and employee benefit plans. The FAQs indicate that this future guidance will provide sufficient time for plan amendments and to make any necessary operational corrections to plans for periods prior to the issuance of that guidance. Among the unanswered questions which may be addressed in that future guidance may be:
- What, if any, survivor annuity rights must be provided to the same-sex spouse of a retired employee who commenced pension benefits prior to the September 16, 2013, effective date?
- What, if any, pre-retirement survivor annuity benefits must be provided to a same-sex surviving spouse where the employee spouse died prior to the September 16, 2013, effective date?
- What, if anything, must a defined contribution plan do if death benefits have been paid to a non-spousal beneficiary without the same-sex spouse's consent?
- Although not directly controlling with regard to private employer pensions, the Office of Personnel Management announced earlier in August that retirees under the federal government's Civil Service Retirement System who are in legal same-sex marriages will have a two-year window through June 26, 2015, during which they may elect to convert their current retirement benefits into an actuarially reduced benefit providing a surviving spouse benefit. Might this serve as a roadmap for retroactive obligations to be imposed on defined benefit pension plans?
- Church Plans: Revenue Ruling 2013-17 indicates that the IRS's recognition of same-sex marriages will be applicable for all federal tax purposes. What about church plans which are exempt from the Employee Retirement Income Security Act (ERISA)? Presumably, those retirement plans that have been structured to fall within the scope of Internal Revenue Code Sections 401(a), 403(b) or 457 will be required to extend any spousal protections thereunder to same-sex spouses. For health benefit plans (such as medical, dental and vision care plans), clearly any coverage made available to same-sex spouses will now be afforded the same federal tax treatment as spousal coverage generally. However, the IRS's position would not appear to otherwise compel church plans to make same-sex spousal rights or coverage available in the absence of an applicable state law mandate.
- State Government Plans: How will plans maintained by state governments or their instrumentalities be impacted by the positions outlined in Revenue Ruling 2013-17? As we have previously noted, the Supreme Court did not address or strike down Section 2 of DOMA, which provides that no state shall be required to give effect to any public act, record or judicial proceeding of any other state respecting a relationship between persons of the same sex that is treated as a marriage under the laws of that other state. Can the IRS's establishment of a uniform standard for same-sex marriage be reconciled with this reservation of power to the individual states?
IMMEDIATE COURSE OF ACTION
Many employers have been reluctant to move forward with benefit plan design and administrative changes to reflect the Supreme Court's decision in Windsor until guidance has been issued. With the issuance of Revenue Ruling 2013-17, now is the time to act. With the September 16, 2013, effective date quickly approaching, here are steps that every employer should begin to take, if they have not begun so already:
- Review qualified plan administrative procedures and policies and be prepared to implement spousal rights for same-sex spouses prospectively as of September 16, 2013. These will include spousal consent to the designation of alternative death beneficiaries, spousal joint and survivor annuity rights under defined benefit plans and spousal rollover rights and favorable minimum required distribution calculations for surviving spouse benefits under retirement plans.
- Implement payroll changes for the imputed value of health benefit coverage. Many employers have already begun to implement changes to payroll to eliminate imputed federal taxable income for same-sex couples' benefits for their employees who reside in states which recognize the validity of same-sex marriages. Employers will now need to make these changes for all federally recognized same-sex married couples, regardless of the state of residence. For state income tax purposes, employers will still need to assess on a state-by-state case whether the value of any such coverage must be imputed in state taxable income.
- Review desirability of filing for refund on FICA/Medicare Tax overpayments. Employers who have made same-sex spousal medical coverage available in the past should assess the economic benefit of filing for refunds on the employer portion of FICA and Medicare tax payments on the imputed value of that coverage.
- Review medical plan documents and insurance policies for definitions of key terms. Employers who have not provided same-sex spousal coverage will need to review their plan documents to assess whether plan document or policy contract amendments are necessary. Language which defines an employee's "spouse" with reference to federal tax laws, and which prior to Revenue Ruling 2013-17 would have been interpreted as excluding same-sex spouses, will need to be revisited if a plan's current design is to be maintained.
Last week's publication of Revenue Ruling 2013-17 and the FAQs serve as a clarification and guidance of the IRS's position regarding the impact of the Windsor decision on a broad range of tax matters, including the administration of tax-qualified retirement plans and the tax reporting and withholding obligations for tax-favored employee benefits.