As we previously reported, in United States v. Windsor, 133 S. Ct. 2675 (2013), the U.S. Supreme Court held section 3 of the Defense of Marriage Act to be unconstitutional. Section 3 of the Defense of Marriage Act provides that, in any federal statute, the term “marriage” means a legal union between a man and a woman as husband and wife, and that the term “spouse” refers to a person of the opposite sex.
In response to Windsor, the Internal Revenue Service (the “IRS”) issued Revenue Ruling 2013-17 (the “First Ruling”) and Frequently Asked Questions (the “FAQs”) to provide guidance relating to the marital status of a same-sex spouse for purposes of the Internal Revenue Code of 1986 (the “Code”). As follow-up guidance to the First Ruling, the IRS issued Revenue Ruling 2013-61 (the “Second Ruling”) to provide special administrative procedures for employers to recover overpayments of employment taxes with respect to certain benefits provided to same-sex spouses. In addition, the U.S. Department of Labor (the “DOL”) issued Technical Release 2013-04 (the “Release”) to provide general guidance on the meaning of the terms “spouse” and “marriage” under the Employee Retirement Income Security Act of 1974 (“ERISA”) and certain provisions of the Code subject to its rulemaking authority.
According to the First Ruling and the Release, for purposes of the Code and ERISA, the terms “spouse,” “husband” and “wife” include an individual who is legally married to a person of the same sex in any state or foreign jurisdiction that authorizes same-sex marriage, and the term “marriage” includes such legally recognized same-sex marriage. Such terms do not include any individual who has entered into a registered domestic partnership, a civil union or any other similar formal relationship (whether with a person of the opposite or same sex). Both the First Ruling and the Release clarify that a same-sex marriage will be valid so long as the couple is married in a state that recognizes same-sex marriage, even if the state in which the couple lives does not – the so-called “Place of Celebration” rule. In taking this position, both the IRS and the DOL expressly rejected the alternative approach that would have recognized the validity of marriage based on the laws of the state in which the couple lived at any given time.
The First Ruling has been in effect prospectively as of September 16, 2013. As a result, regardless of the terms of the applicable plan documents, all employee benefit plans must be operated in compliance with the First Ruling for federal tax purposes. As mentioned in the FAQs, a qualified retirement plan must therefore treat a legally married same-sex spouse (but not a domestic partner or an individual in a similar relationship) as a spouse for purposes of satisfying the federal tax rules relating to qualified retirement plans, such as the requirement for spousal consent in beneficiary designations, even if the employer operates in a state that does not recognize same-sex marriage. In addition, plans that provide health or welfare benefits to same-sex spouses will no longer report imputed income for such spousal benefits, in contrast with the income imputed for benefits offered to domestic partners.
With respect to any employer-provided health benefits or fringe benefits that are excludible from income under the Code based on an individual’s marital status, the First Ruling may be applied retroactively to file a claim for refund or credit to recover overpayments of employment and income taxes. Such retroactive relief is available only if the applicable statute of limitations for filing a claim is open (typically, the limitations period is three years) and a consistent position is taken on the return or claim.
In the Second Ruling, the IRS specifically provides special alternative procedures for recovering overpayments of employment taxes. Such procedures are optional and are intended to ease the burden on employers that would otherwise have to file a separate Form 941-X for each calendar quarter for which a refund claim or adjustment is made. Under these special procedures, employers are permitted to use the fourth-quarter 2013 Form 941 to correct overpayments of employment taxes with respect to the first three quarters of 2013, or, alternatively, to file one Form 941-X for the fourth quarter of 2013 to correct overpayments of FICA taxes for all quarters of 2013. Additionally, with respect to any calendar years preceding 2013, employers may recover overpayments by filing one Form 941-X for the fourth quarter of such prior year, so long as the period of limitations has not expired (and, in the case of adjustment, the period of limitations will not expire within 90 days after filing the adjusted return).
The IRS has not extended a retroactive application of the First Ruling to matters relating to qualified retirement plans. Rather, the IRS has indicated in the First Ruling that it will issue further guidance regarding how the Windsor decision will apply to qualified retirement plans and other tax-favored retirement arrangements, including guidance regarding plan amendments and any required corrections relating to plan operations to preserve the tax-qualified status of the plan. Similarly, the DOL has indicated in the Release that future guidance will be issued addressing specific provisions of ERISA.
Pending further guidance by the IRS and the DOL, employers and plan sponsors should review and update, as appropriate, all plan documents and plan-related materials to ensure that they comply with the guidance described above. Such efforts may involve multiple parties and may require, among others, coordinating with the plan's third-party administrators, insurance providers and trustees, as well as communicating with plan participants. Employers and plan sponsors may want to consider whether they wish to take any additional steps depending upon their own particular circumstances, even before additional guidance is issued. Employers may also wish to consider the use of the special procedures available under the Second Ruling to recover any overpayments of employment taxes.
Numerous questions regarding a wide range of employee benefits remain after Windsor. The First Ruling and the Second Ruling, together with the FAQs and Release, are only the first steps that will be taken by the regulators to clarify the way that applicable rules will apply to same-sex spouses.