Under a new Internal Revenue Service ruling, employees who pay for their spouse's health insurance on an after-tax basis may treat these costs as excludable from federal income taxes, even if they live in a state that doesn't recognize their marriage. State income taxes are another matter, however.
The U.S. Department of the Treasury and the IRS ruled on Aug. 29, 2013, that same-sex couples who were legally married will be treated as married for federal tax purposes, including the pretax treatment of a spouse's health insurance coverage, in all 50 states and the District of Columbia. Revenue Ruling 2013-17 applies, in other words, regardless of whether the couple now live in a state that recognizes same-sex marriage or a state that does not recognize same-sex marriage.
The ruling implements federal tax aspects of the Supreme Court's June 26 decision in United States v. Windsor, which invalidated a key provision of the 1996 Defense of Marriage Act.
Revenue Ruling 2013-17 applies to all federal tax provisions in which marriage is a factor, including filing status, claiming personal and dependency exemptions, employee benefits, and claiming the earned income tax credit or child tax credit.
The ruling covers same-sex marriages entered into in one of the U.S. jurisdictions where such marriages are recognized as legally valid (sometimes referred to as the "state of celebration," as opposed to a couple's state of residency), as well as legal marriages performed in a foreign country. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.
Employee Benefits Affected
Under the ruling, same-sex couples will be treated as married for all federal tax purposes. Those who purchased same-sex spouse health insurance coverage from their employer on an after-tax basis may treat the costs of that coverage as pretax and excludable from income (for federal income tax purposes; state income taxes may still apply).
"Same-sex spouses legally married anywhere no longer are taxed on health benefits coverage for their spouses and can pay premiums pretax, even if they live in a non-recognition state such as Florida, Texas, etc. This is a huge development and a relief for these employers and employees," Todd Solomon, a partner in the employee benefits practice group of McDermott Will & Emery LLP in Chicago, told SHRM Online.
"However, state taxation of benefits may continue to be quite complex, although it remains to be seen how states will treat this," Solomon added. "On the flip side, the guidance may not be welcome for employers who currently do not offer same-sex partner benefits because now they are legally required to offer benefits to same-sex spouses in all states."
Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously taxed health insurance and other benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of Revenue Ruling 2013-17.
Other agencies may provide guidance on federal programs they run that are affected by the Internal Revenue Code, Treasury said.
Retroactive Application and Refund Claims
The IRS set a prospective effective date for the ruling of Sept. 16, 2013. Legally married same-sex couples must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status.
For prior tax years still open under the statute of limitations, individuals who were in same-sex marriages may opt to file original or amended returns choosing to be treated as married for federal tax purposes. 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. As a result, refund claims can still be filed for tax years 2010, 2011, and 2012. Some taxpayers may have special circumstances (such as signing an agreement with the IRS to keep the statute of limitations open) that permit them to file refund claims for tax years 2009 and earlier.
With respect to retroactivity for prior years, "employers are still in wait-and-see mode until the IRS issues further guidance," said Solomon. "What we know is that employees and employers have the right—but not the obligation—to file for refund claims on past taxes paid on same-sex spouse benefits in open tax years—typically 2010, 2011, and 2012."
"Employers can expect to get requests from employees for corrected Form W-2s from these prior years," Solomon noted. "But what is not clear yet is how to handle cafeteria plan participation and tax reporting for prior years and whether adjustments need to be made. The IRS will be issuing more guidance on this issue as well as the retroactive impact of the guidance on retirement benefits that have or in many cases have not been paid to same-sex spouses."
Along with Revenue Ruling 2013-17, the IRS released two related sets of frequently asked questions and answers:
- Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law.
- Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions.
The IRS ruling "assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change,” Treasury Secretary Jacob J. Lew noted in a released statement.
The IRS yesterday announced in Revenue Ruling 2013-17 that same-sex couples who are legally married in any state or other jurisdiction that recognizes same-sex marriages (including the District of Columbia, a U.S. territory or a foreign country) will be treated as married for all federal tax purposes, even if the couple lives in a jurisdiction that does not recognize same-sex marriages. Participants in marriage-equivalent relationships (i.e., domestic partnerships and civil unions) will not be recognized as married for federal tax purposes. The IRS also released updated Frequently Asked Questions for taxpayers in same-sex marriages and marriage-equivalent relationships, and for employers who sponsor qualified retirement plans and health and welfare plans.
This guidance comes in the wake of the U.S. Supreme Court’s decision in U.S. v. Windsor, which struck down as unconstitutional section 3 of the Defense of Marriage Act (“DOMA”). DOMA prohibited the federal government from recognizing an otherwise valid marriage between two persons of the same sex. As our July 2013 Benefits Report explains, Windsor raised more questions than it answered with respect to employee benefit plans. Yesterday’s announcement provides a clear answer to many of those questions. Additional guidance is planned, and guidance on non-tax issues affecting employee benefit plans is expected from other federal agencies.
Impact on Plan Interpretation and Administration
As a result of yesterday’s ruling, plan sponsors must treat all individuals in same-sex (and opposite-sex) marriages as married for all federal tax purposes, effective as of September 16, 2013. Below is a brief description of the impact of this ruling on employee benefit plans.
Revenue Ruling 2013-17 will require qualified retirement plans to:
- Provide a qualified joint and survivor annuity and/or a qualified optional survivor annuity to all participants in same-sex marriages, if the plan is subject to the QJSA rules
- Provide a qualified preretirement survivor annuity to a married participant’s same-sex surviving spouse, if the plan is subject to the QJSA rules (optionally, a plan may provide a pre-retirement survivor annuity to a participant’s beneficiary, including a surviving domestic partner)
- Require the consent of a participant’s same-sex spouse to the participant’s election of an optional form of benefit (and not require such consent in the case of an unmarried participant, including a participant in a domestic partnership or civil union)
- Require the consent of a participant’s same-sex spouse to the participant’s designation of a non-spouse beneficiary (optionally, a plan may also require the consent of a domestic partner)
- Require the consent of a participant’s same-sex spouse to a loan from certain retirement plans (optionally, a plan may also require the consent of a domestic partner)
- Recognize a same-sex spouse as a spouse for purposes of safe-harbor hardship distribution rules
- Follow a qualified domestic relations order awarding benefits to a participant’s same-sex former spouse
- Recognize a same-sex spouse as a spouse for purposes of the required minimum distribution rules and minimum distribution incidental benefit rules
- Permit same-sex surviving spouses to elect a direct rollover to an eligible retirement plan or IRA (not just an “inherited IRA”)
In addition, health and welfare plan sponsors may:
- Stop imputing income for the value of employer-paid health coverage provided to an employee’s same-sex spouse and permit pre-tax payroll contributions through a cafeteria plan for an employee’s share of the cost of group health coverage provided to his or her same-sex spouse
- Make adjustments for income tax withholding that was over-withheld from an employee during the current year (employees may claim refunds of federal taxes paid on previously imputed income and after-tax employee contributions for all open years prior to the current year, i.e., generally the past three years)
- File an amended payroll tax return to claim a refund of the employer portion (and employee portion if the employee’s whereabouts are known) of Social Security and Medicare taxes paid on previously imputed income and after-tax employee contributions for all open years
- Permit reimbursement of qualifying medical expenses of an employee’s same-sex spouse (and spouse’s children) from Health Flexible Spending Accounts (“Health FSAs”) and Health Reimbursement Accounts (“HRAs”)
- Permit reimbursement of qualifying dependent care assistance expenses for an employee’s eligible disabled same-sex spouse or the same-sex spouse’s child under a Dependent Care Assistance Program (“DCAP”)
Open Questions to be Addressed in Future Guidance
Yesterday’s ruling only addresses legal issues over which IRS has regulatory authority. The IRS intends to issue future guidance regarding the retroactive effect of the Windsor decision, including a special procedure that employers can follow to claim refunds of payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses.
In addition to further IRS guidance, we anticipate additional guidance on non-tax issues from other agencies, including the Department of Labor (“DOL”), Department of Health and Human Services (“HHS”) and Centers for Medicare and Medicaid Services. The DOL Wage and Hour Division recently updated Family Medical Leave Act Fact Sheet 28F to recognize same-sex marriages that are valid in the employee’s state of residence. Yesterday, HHS announced that an individual who is enrolled in a Medicare Advantage plan will have equal access to coverage in a nursing home where his or her same-sex spouse lives.
Issues not addressed by the ruling include:
- Whether the recognition by the IRS of a participant’s same-sex marriage is a permitted election change event under Code Section 125 that would allow an employee to elect mid-year to (a) enroll his or her spouse in an employer-sponsored health and welfare plan or change benefit options, or (b) increase contributions to a Health FSA or DCAP
- Whether and the extent to which certain ERISA-required disclosures must be provided to a plan participant’s same-sex spouse or former spouse
- Whether plans covering only a business owner and his or her same-sex spouse are subject to ERISA
