Vedder Thinking | Articles IRS Issues Guidance Regarding Same-Sex Spouses
On August 29, 2013, the Internal Revenue Service (IRS) issued widely anticipated guidance regarding the application of the Supreme Court's June 26, 2013 DOMA decision in United States v. Windsor to the taxation and benefits provisions of the Internal Revenue Code. The IRS issued its guidance in the form of Revenue Ruling 2013-17 and two sets of FAQs (one set relating to same-sex spouses and one set relating to domestic partners and individuals in civil unions). This article summarizes the new IRS guidance about same-sex spouses.
General IRS Principles
The key takeaway from this guidance is the IRS's decision to apply uniform rules for Federal income tax and benefits purposes. Thus, same-sex spouses lawfully married under the law of a state or foreign jurisdiction are lawfully married for Federal tax and benefits purposes regardless of where they reside
The guidance is limited specifically to same-sex spouses. Thus, individuals (same sex or opposite sex) who are recognized under state law as registered domestic partners or members of a civil union are not married for Federal tax or benefits purposes.
In addition, this guidance does not affect a state's determination of whether an individual is married for state income tax or other purposes.
Application to Specific Benefits
Taxation of Medical Coverage: Same-sex spouses are eligible to receive the same tax-free medical coverage as are opposite-sex spouses. This is the case for both the value of any employer-provided premium subsidy, and the value of employee premiums that can be paid on a pre-tax basis under the employer's Section 125 cafeteria plan. Medical reimbursements for same-sex spouses under a Section 125 health care flexible spending account are also tax-free.
Refunds of Income Taxes and FICA Taxes: Employees who previously received imputed income because their employer-provided insurance covered their same-sex spouse (or his/her eligible dependent children) under the medical plan may file for tax refunds for any tax years for which the statute of limitations for refunds has not expired (generally 2010 through 2012).
Employers may make adjustments for excess amounts of income taxes withheld from an employee during 2013 if the employer has repaid or reimbursed the employee for the over-withheld income tax before the end of 2013. Employers may not seek refunds for over-withheld employee income taxes for 2012 and prior years. (Only the employee may seek such refunds).
Employers may file for refunds of Social Security taxes and Medicare taxes (collectively, FICA taxes) paid on amounts that otherwise would have been excluded for FICA tax purposes if the same-sex spouses had previously received the same tax-free coverage accorded to opposite-sex spouses. If the employer cannot locate a former employee after reasonable efforts, or if a located former employee does not give the employer permission to seek a refund on his or her behalf, the employer may seek a refund on only the employer's portion of the FICA taxes. The IRS has promised to issue in the near future a special administrative procedure for employers to file claims for refunds or to make adjustments for excess FICA taxes paid on same-sex spouse benefits.
Qualified Plan Death Benefits: Same-sex spouses have the same automatic survivorship rights under tax qualified retirement plans as do opposite-sex spouses.
- A same-sex spouse must receive a pre-retirement survivor annuity under a defined benefit or money purchase pension plan unless the plan permits the spouse to waive that benefit and the spouse affirmatively waives that benefit.
- A same-sex spouse must be the sole beneficiary under a 401(k), profit sharing or stock bonus plan unless the plan permits that spouse to waive that right and the spouse affirmatively waives that right.
The IRS guidance is generally effective prospectively from September 16, 2013, although due to the retroactive nature of the Windsor decision, individuals and employers may file for retroactive tax refunds provided that the normal statute of limitations relating to refund claims (generally three years) has not lapsed.
Employee benefit plans are required to be in compliance with Revenue Ruling 2013-17 and its related guidance as of September 16, 2013. Again, due to the retroactive nature of the Windsor decision, the IRS has promised future guidance regarding the application of the Windsor decision and Revenue Ruling 2013-17 to employee benefit plan documents and operations prior to September 16, 2013.
The IRS guidance answers many questions prompted by the Windsor decision but leaves others unanswered. What is clear is that employers in all states, and not just those in states that recognize same-sex marriages, now need to review their employee benefit plan terms and participant communications, as well as their payroll and benefit plan administration practices, in light of this change in Federal law.
If you have any questions regarding this bulletin, you may contact Thomas G. Hancuch, Philip L. Mowery, Kelly A. Starr or any Vedder Price attorney with whom you have worked.