On August 29, 2013, the IRS issued guidance on the treatment of
same-sex spouses for federal tax and benefits purposes following
the Supreme Court's June 26, 2013 holding in U.S. v.
Windsor.
The Supreme Court in Windsor invalidated Section
3 of the 1996 Defense of Marriage Act (DOMA). Section 3 of
DOMA had provided that "the word 'marriage' means only
a legal union between one man and one woman as husband and wife,
and the word 'spouse' refers only to a person of the
opposite-sex who is a husband or a wife." This provision
had the effect of nullifying a state's legalization of same-sex
marriage for all federal law purposes.
Based on the holding in Windsor, the IRS ruled in
Revenue Ruling 2013-17 that same-sex couples who are legally
married in any U.S. state, the District of Columbia, a U.S.
territory, or a foreign jurisdiction that has legalized same-sex
marriage will be treated as married for federal tax law purposes,
including the pre-tax treatment of a same-sex spouse's health
insurance coverage. This rule applies regardless of the
couple's current state of residence.
However, this IRS ruling has no direct effect on state income
taxes, which still must be assessed on a state-by-state law
basis.
Revenue Ruling 2013-17 applies to all federal tax law provisions
in which marriage is a factor, including employee benefits, income
tax filing status, and claiming personal and dependency exemptions
and the earned income tax credit and child tax credit.
However, the ruling does not apply to registered
domestic partnerships, civil unions or similar formal same-sex
relationships recognized under state law that are not marriages
under state law.
Impact on Health Benefits
Those employees who purchase health insurance coverage for their
same-sex spouse through their employer may pay the cost of such
coverage on a pre-tax basis and exclude the amount of the coverage
from income for federal income tax purposes. Similarly,
employers may exclude from income the cost of health insurance
coverage for a same-sex spouse that is paid for by the
employer. Same-sex spouses and opposite-sex spouses are now
treated the same under these health insurance tax rules, so the
burden on plan administrators is significantly reduced.
Employers should remember, however, that states can continue to
tax health insurance differently for same-sex versus opposite-sex
spouses and that the laws of the particular state will need to be
monitored in this regard.
Impact on Qualified Retirement Plans
In supplemental Q&As also issued on August 29, 2013, the IRS
reiterated its position that qualified retirement plans must treat
a same-sex spouse as a "spouse" under all of the federal
tax rules relating to qualified retirement plans.
In this regard, these Q&As require qualified retirement plans
to comply with this rule operationally as of September 16, 2013
(the date this ruling will be published in the Federal
Register). The IRS has promised further guidance on when
qualified retirement plans will need to be amended to include this
rule and to what extent this rule is to be applied
retroactively. Plan sponsors should be prepared to implement
additional changes once this guidance is published.
Retroactive Application and Refund Claims
Revenue Ruling 2013-17 establishes a general prospective
effective date of September 16, 2013. With respect to prior
years, individuals who were in same-sex marriages
at the time may (but are not required) to file amended returns
choosing to be treated as married for all federal tax law purposes
for tax years still open under the statute of limitations.
Generally, the statute of limitations for filing a refund claim is
three years from the date the return was filed or two years
from the date the tax was paid, whichever is later. We
anticipate that employers will receive requests from affected
employees for corrected Form W-2s relating to health benefit
contributions for these prior years so that they may file amended
tax returns.
Employers may not file refund claims for
overwithheld income tax paid on same-sex spouse health benefits in
prior tax years. Only the individual employees can make these
refund claims. However, employers may make adjustments for
overwithheld income taxes that were withheld from an employee in
the current year, provided the employer repays or reimburses
the employee for the overwithheld income tax before the end of the
current calendar year.
Conclusion
The IRS ruling is intended to bring uniformity to a workforce
and treat legally married same-sex spouses in the same manner as
legally married opposite-sex spouses for tax and benefits
purposes. According to Treasury Secretary Jacob J. Lew, it
also "assures legally married same-sex couples that they can
move freely throughout the country knowing that their federal
filing status will not change."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
