Following the United States Supreme Court's decision in U.S. v. Windsor, the Internal Revenue Service ("IRS") has issued Revenue Ruling 2013-17, which includes significant guidance on the treatment of same-sex couples and spouses under the nation's tax laws, including the employee benefits provisions of the Internal Revenue Code.
Background
In U.S. v. Windsor, the U.S. Supreme Court held that Section 3 of the Defense of Marriage Act ("DOMA") is unconstitutional. Our newsletter discussing the Windsor case and its impact on employee benefits may be accessed here. As a result, federal law will recognize valid same-sex marriages.
The Internal Revenue Code includes hundreds of provisions that refer to a taxpayer's marital status or spouse. For employee benefits purposes, these provisions give an employee's spouse a tax benefit, an entitlement (usually in the context of qualified retirement plans) or an obligation, such as under a QDRO.
The IRS's Position
Revenue Ruling 2013-17 includes a lengthy discussion of the IRS's position on recognizing marriages under state law and concludes as follows:
- For federal tax purposes, a same-sex couple will be
recognized as married if the couple was validly married in
a state that authorizes same-sex marriages. Neither the
state of the couple's residence nor the state(s) in which
either spouse works is relevant.
- For federal tax purposes, the term "marriage" does not include domestic partnerships, civil unions, or other formal relationships recognized under state law that are not denominated as "marriage" under state law.
Effect on Employers
The IRS's position will have the following general effects on employee benefit plans:
- Beginning immediately, for plan administrative purposes, with
respect to Federal mandates such as qualified plan death benefits,
employers must treat same-sex spouses the same as they would treat
opposite-sex partners. For example, if a spousal waiver is required
in order for an employee to designate an alternate death
beneficiary, the waiver should be secured from a same-sex spouse as
well as an opposite-sex spouse.
- Employers generally do not have to treat same-sex spouses the
same as opposite-sex spouses in the absence of a mandate. For
example, an employer-provided medical plan could cover opposite-sex
spouses but not same-sex spouses. Although opinions differ on this
point, this should be the case even in states that have laws that
prohibit workplace discrimination based on sexual orientation,
since such laws would be pre-empted as they relate to ERISA
plans.
- Marriage is based on the state law of the state where the
marriage is validly entered into.
- Employers should make employees aware that valid same-sex
marriages are recognized for purposes of the employer's
employee benefit plans and explain to employees the benefits that
are available to spouses. Such communication should also explain
that domestic partner, etc., relationships are not marriages and
the partners in such arrangements are not spouses.
- Employers that have domestic partner policies and that have
been providing employer-provided coverage for domestic partners
should review the evidence that was submitted to support domestic
partner status. For those states that currently recognize same-sex
marriages, such evidence could well include a marriage certificate
issued by a state that recognizes same-sex marriages. In such a
case, the domestic partner is now considered a spouse and should be
treated accordingly.
- Proof of marriage that may be required by employers should be
the same for all marriages. In general, we believe that requiring
proof of marriage is not practical unless employees are required to
update that proof periodically. Note, however, that anecdotal
evidence is that up to 20% of employees falsely claim individuals
to be their spouses and dependents and a periodic audit may save
the employer significant funds.
- Benefits that are provided on a tax-free basis to an employee's spouse must now be provided on a tax-free basis to both same-sex and opposite-sex spouses. It is no longer necessary for an employer to impute income for employer-provided coverage for same-sex spouses. It is, however, necessary to continue to impute income for employer-provided coverage for domestic partners, etc.
Retroactive Effect
The Revenue Ruling has several retroactive consequences:
- Individuals may file amended tax returns for open tax years to
claim refunds for tax-free benefits that were treated as
taxable.
- Employers may file claims for refunds of employment taxes for
employer provided tax-free health coverage benefits or fringe
benefits that were treated as taxable.
- There is not yet a requirement for employers to issue amended Forms W-2 or to amend plans. The IRS has promised more guidance on the application of the Windsor case to employee benefit plans, including guidance on necessary plan amendments.
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.
