Since the Supreme Court’s decision in late June to invalidate Section 3 of the Defense of Marriage Act (DOMA) in the U.S. v. Windsor case, some questions regarding taxes and employee benefit plans have remained unanswered. The IRS has now resolved the remaining DOMA questions by issuing Revenue Ruling 2013-17 along with two sets of Frequently Asked Questions (FAQ’s), which took effect as of September 16, 2013.
The new IRS document makes it clear that:
- A same-sex marriage that is valid in the place of celebration (a state or a foreign jurisdiction having the legal authority to sanction marriage) will be recognized, regardless of where the parties live.
- The terms spouse, husband and wife will be defined on a gender-neutral basis for all federal purpose, to refer to individuals who are lawfully married under state law.
- The term marriage does not include registered domestic partnerships, civil unions or other similar formal relationships recognized under state law that are not denominated by that state’s law as marriage. As such, the terms spouse, husband and wife do not include individuals who have entered into such a formal relationship. This is the case whether the parties are of the same or opposite sex.
The IRS made note in the Revenue Ruling that it expects to issue further guidance, specifically with regard to employee benefits and employee benefit plans, pertaining to potential consequences of retroactive application of the new law and to provide plan sponsors with sufficient time for plan amendments and any necessary corrections.
Because employee benefit plans are regulated by federal law, many questions have arisen regarding the extent to which Windsor will affect the administration of retirement plans, health plans and other employee benefit plans. The Internal Revenue Service and the Department of Labor have recently provided guidance on how they will apply the Windsor decision that answers many of these questions.
As a result, even in states that do not recognize same-sex marriage, employers will be required to recognize same-sex spouses married in other states for many employee benefits purposes, including the following:
- Spousal consent requirements for distributions and beneficiary designations. For example, a 401(k) plan participant must now obtain the consent of his or her same-sex spouse to designate a beneficiary other than the spouse.
- Special spousal distribution rights and privileges. For example, upon the death of a participant, the participant’s same-sex spouse can now roll over distributions into the spouse’s IRA or employer plan.
- Spousal rights to retirement plan benefits upon divorce. For example, retirement plans must now honor valid court orders granting a participant’s retirement benefits to his or her former same-sex spouse.
The ruling does not require employers to offer health insurance benefits to the spouses of married same-sex employees, although some states do require that if such benefits are offered to opposite-sex spouses they are also offered to same-sex spouses. If such benefits are offered, however, then new IRS and Department of Labor rules require that:
Medical, dental and vision coverage for same-sex spouses is now tax-free. (Previously, employees were imputed taxable income of the value of coverage provided to same-sex spouses. The imputed income was subject to income taxation and other withholding taxes.)
Health expenses incurred by same-sex spouses are now reimbursable by flexible spending accounts, health reimbursement accounts and health savings accounts.
COBRA coverage and HIPAA special enrollment rights are now available to same-sex spouses.
Are you in Compliance?
The IRS guidance became effective Sept. 16. As a result, employers should act fast to revise administrative procedures to comply with the new requirements. In order to ensure compliance, employers should do the following:
- Revise retirement plan administrative procedures to ensure that same-sex spouses are treated as spouses for spousal consent and spousal distribution purposes.
- Review plan documents to confirm that the terms “spouse” and “marriage” are properly defined. The IRS has indicated that it will provide further guidance on the timing requirements for technical plan amendments to comply with new guidance. However, if a plan amendment is needed to clarify that same-sex spouses may or may not participate in a plan, an amendment should be adopted as soon as possible.
- If an employer provides health coverage to same-sex spouses, it should revise its tax withholding procedures as soon as possible so that the value of same-sex spouse coverage is no longer imputed in income.
- If an employer provides health coverage to same-sex spouses, COBRA and special enrollment procedures should be revised to recognize same-sex spouses.
Notice 2013-61 provides guidance to employers and employees to make claims for refund or adjustments of overpayments of Federal Insurance Contributions Act, or FICA, taxes and federal income tax withholding employment taxes resulting from the Supreme Court’s decision in United States v. Windsor, and the holdings of IRS Revenue Ruling 2013-17 and Internal Revenue Bulletin 2013-38 (see Treasury and IRS Recognize Same-Sex Marriages for Tax Purposes).
The notice also provides special administrative procedures that can be used by employers to claim refunds or make adjustments of overpayments of employment taxes that have been paid with respect to same-sex spouse benefits for 2013, along with a special administrative procedure that can be used for overpayments of FICA taxes for years before 2013.