The IRS’s recent ruling on the application of the Supreme Court’s landmark decision on same-sex marriage reaches not only federal income and estate taxes generally, but also impacts the tax treatment of a variety of employee benefits.
Prior to the Supreme Court’s decision in United States v. Windsor, the IRS interpreted the Defense of Marriage Act (DOMA) as barring recognition of same-sex marriages with respect to the Internal Revenue Code (the Code). DOMA required that the words marriage and spouse be interpreted with gender-specificity under all federal laws and rulings. Thus, the law limited the meaning of marriage to one between one man and one woman and the meaning of spouse to a person of the opposite sex. In Windsor the Supreme Court struck down this provision of the law as unconstitutional.
In response to the Court’s opinion, the IRS issued a ruling that explicitly recognizes, for federal tax purposes, any marriage between same-sex individuals validly entered into in a state whose laws authorize such a marriage even if the individuals live in a state that does not. It does not treat civil unions as marriages. As a result of Revenue Ruling 2013-17 (the Ruling or the IRS Ruling), legally-married same-sex couples will be required to file their federal income tax returns as married filing jointly or married filing separately. The IRS Ruling became effective on September 16, 2013 – prospectively entitling eligible same-sex married couples to the same federal tax treatment as heterosexual married couples. It also applies retroactively to open tax years, allowing eligible same-sex couples to file amended tax returns to change their filing status for tax years whose three-year statute of limitations have not closed.
Health and other Employer-Provided Benefits
Notably, the tax treatment of employer-provided health and other benefits will be affected by the IRS ruling. Going forward, benefits provided to same-sex spouses will receive the same tax advantages as those received by opposite-sex spouses. For example, employees will be able to receive eligible health care benefits tax-free and pay health insurance premiums for their same-sex spouses on a pretax basis. In addition, the Frequently Asked Questions released by the IRS specify that if an employer provided health coverage for an employee’s same-sex spouse during any open tax years, the employee may claim an income tax refund for taxes paid on the value of coverage that would have been excluded from income had the employee’s spouse been recognized as the employee’s legal spouse for tax purposes. In addition to health care coverage, the Ruling also applies retroactively for the purposes of filing original, amended, and adjusted returns with respect to any employee benefit plan or benefit providing qualified tuition reductions (Code Section 117(d), meals and lodging for the convenience of the employer (Code Section 119), dependent care assistance (Code Section 129) or other fringe benefits (Code Section 132).
Pursuant to the Ruling, a same-sex spouse must be treated as a spouse with respect to federal tax laws applicable to qualified retirement plans. For example, a plan that provides benefits to a participant’s spouse upon the participant’s death must make such payment to a same-sex spouse unless the spouse has consented to another beneficiary. While the Ruling has retroactive effect in some areas, its application to qualified retirement plans is prospective only. Additional guidance on the application of the Ruling and Windsor to qualified retirement plans is expected.
FICA and Medicaid Overpayments
Employers can claim refunds for excess social security and Medicaid taxes paid on benefit amounts treated as income in situations where the tax treatment of income is recharacterized pursuant to the Ruling.
Employer Action Items
Employers should review their employee benefit plans and, where needed, amend them to ensure that same-sex spouses receive the benefits they are entitled to pursuant to the IRS Ruling. They may need to obtain information about same-sex spouses as part of their employee records for this purpose. Finally, employers should begin to assess the impact of the ruling on employees and the scope of tax refunds that may be available to them. Additional guidance on the refund process is expected.