On Aug. 29, the U.S. Department of the Treasury (Treasury) and Internal Revenue Service (IRS) released long-awaited guidance as to how the Internal Revenue Code should be interpreted in light of the June 26, 2013, decision of the United States Supreme Court in United States v. Windsor, __ U.S. __, 133 S.Ct. 2675 (2013). The Court in Windsor held that Section 3 of the federal Defense of Marriage Act (DOMA) was unconstitutional as a deprivation of the liberty of those protected by the Fifth Amendment. The guidance is Revenue Ruling 2013-17 and accompanying Frequently Asked Questions (the Guidance).
The focus of the Guidance is income taxes, but the general principles apply to benefit plans and there are some specific benefit provisions in the FAQs. Here is a summary of the Guidance as it relates to spousal benefits under various types of employee benefit plans.
Section 3 of DOMA, as applied to the tax laws, 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.
Windsor involved the denial by the IRS, pursuant to Section 3, of the federal estate tax marital deduction for amounts passing to the surviving spouse in a same-sex marriage. The Court’s holding that Section 3 was unconstitutional meant that this deduction had to be allowed.
There are over 1,000 federal laws in which benefits, rights and privileges are contingent on marital status or in which marital status is a factor. Windsor provided no road map of what should happen under these statutes (apart from the estate tax marital deduction) now that Section 3 is no longer the law. The Guidance is the first on applying Windsor to other tax provisions.
Summary of the Guidance as to Employee Benefit Plans
In the benefit plan arena, spouses in same-sex marriages must, post-Windsor, be entitled to the same benefits as spouses in opposite-sex marriages. The terms “spouse,” “husband,” “wife,” “married” and “marriage” must now encompass lawfully married same-sex individuals. Some of the most difficult issues in benefit plan administration involve the transition to this new rule, which is reserved for further guidance. As is always the case when benefit plans are involved, the devil is in the details. However, some of the major questions have been answered.
Determination of Who is a Spouse
In determining who is a spouse for federal tax purposes, the Guidance indicates that the IRS will look at whether the marriage was valid in the state (or foreign jurisdiction) where it was performed, without regard to the current domicile of either party to the marriage. This is commonly called the place of “celebration.” The other alternative of using the state of current residence is completely rejected. Using the place of celebration to determine the validity of a marriage will make for easier administration for employee benefit plans, especially for employers with employees working in several different states.
Example: A and B, both of the same sex, were married in Minnesota, which permits same-sex marriages. Later they move to Wisconsin, where same-sex marriages are not permitted. While living in Wisconsin, A is a participant in Benefit Plan. The plan administrator of Benefit Plan must regard B as the spouse of A for all purposes under Benefit Plan, even though A’s marriage is not recognized in Wisconsin.
The Guidance specifies 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 that state’s law. Accordingly, couples who have entered into such formal relationships — for example, a registered domestic relationship — will not be considered “spouses” for federal tax purposes. (State law may require recognition of domestic partners or civil union partners as “spouses” for some benefit purposes based on state law.)
The Guidance is based on the IRS position with respect to common-law marriage. Under Revenue Ruling 58-66, a couple is treated as married for federal income tax filing status and personal exemptions if their common-law marriage was valid based on state law where the marriage was established. The IRS further determined that a common-law marriage, valid at its inception, is valid for federal tax purposes even if the couple later moves to a state that does not recognize common-law marriage. In establishing a similar rule for the recognition of the validity of same-sex marriages for federal tax purposes, the IRS notes “[a] rule under which a couple’s marital status could change simply by moving from one state to another state would be prohibitively difficult and costly” for both the IRS and taxpayers.
- In determining who is a spouse for federal tax purposes, the Guidance indicates that the IRS will look at whether the marriage was valid in the state (or foreign jurisdiction) where it was performed, without regard to the current domicile of either party to the marriage. This is commonly called the place of “celebration.” The other alternative of using the state of current residence is completely rejected. Using the place of celebration to determine the validity of a marriage will make for easier administration for employee benefit plans, especially for employers with employees working in several different states.
Impact on Employee Benefit Plans
The Guidance addresses only a few issues that are facing benefit plan sponsors and plan administrators. The IRS promises further guidance on open questions, including transition periods and future plan administration. The following items are addressed in the Guidance.
Health Coverage – Employee Income Tax Refunds: The Guidance addresses recouping the income taxes paid on the imputed income reported on an employee’s Form W-2 for the value of the coverage provided to the employee’s same-sex spouse. The employee can file an amended Form 1040 to claim a refund of the federal income tax paid on the value of the coverage that otherwise would have been excludable had the same-sex spouse been recognized as the employee’s legal spouse. Further, where an employer sponsored a cafeteria plan that permitted employees to pay premiums on a pretax basis, an employee who paid premiums for his or her same-sex spouse on an after-tax basis will be able to claim a refund of income taxes paid. In both cases, the amended return should be filed within three years from the date the original tax-year return was filed, or two years from the date the tax was paid, whichever is later.
The employee must make the decision to claim a refund for imputed income or after-tax premiums and will be responsible for filing amended returns and any related expenses. Employers may want to provide information to employees on the amount of imputed income reported on prior Forms W-2.
Health Coverage – Employer Tax Refunds: The employer may claim a refund for the Social Security taxes and Medicare taxes paid on the amounts relating to health coverage described above (both imputed income and after-tax premiums) for limitation periods that are still open. This refund could include both the employer’s share and the employee’s share of these taxes.
A special administrative procedure for employers to file claims for adjustments as the result of same-sex spouse benefits will be issued by the IRS in the near future. If an employer chooses not to file for a refund of these taxes, there are procedures for employees to claim refunds of these taxes on their own.
Employers may not file claims for refunds of excess withholding of income tax for prior years, but may make adjustments for excess amounts withheld from an employee in the current tax year, 2013.
Qualified Retirement Plans: Under the Guidance, qualified retirement plans must treat a same-sex spouse as a “spouse” for plan purposes, including treating all spouses as surviving spouses for death benefit purposes. As discussed previously, the marriage of a same-sex couple is treated as valid if it was valid in the jurisdiction in which the marriage was performed. Therefore, a same-sex spouse legally married in Iowa may be treated as a surviving spouse of an employee now living and working in Wisconsin and covered by a qualified retirement plan sponsored by his or her employer, which is based in Indiana. Under federal law, a qualified retirement plan does not have to recognize a domestic partner or civil union partner as a “spouse.”
Effective Date for Changes
The Guidance applies prospectively as of Sept. 16, 2013. As indicated, however, employees and employers may file for refunds for open periods for taxes relating to healthcare coverage. The IRS has not provided direction about the application of Windsor and the Guidance to qualified retirement plans for periods before Sept. 16, 2013, but is expected to do so.
Plan Amendments and Future Guidance
Plan amendments may be required to ensure that employee benefit plans are in compliance with changes required following Windsor and this Guidance. The IRS intends to issue further guidance regarding qualified plans and other tax-favored retirement arrangements. This future guidance will include plan amendment requirements, including timing of amendments, and corrections for plan operations for periods before future guidance is issued.
We can expect additional clarification from the IRS regarding other employee benefit issues in the coming months. It is also anticipated that other agencies, such as the Department of Labor, will provide separate guidance on how Windsor affects employee benefit plans under ERISA.