September 3, 2013
To the relief of employers, same-sex couples who are legally married in jurisdictions that recognize same-sex marriage (i.e., the "state of celebration") will be treated as married for all federal tax purposes effective September 16, regardless of whether they live in a jurisdiction that recognizes same-sex marriage.
On August 29, the Internal Revenue Service (IRS) and the US Department of the Treasury issued highly anticipated guidance (Revenue Ruling 2013-17) answering some of the questions regarding the taxation and administration of employee benefit plans that were raised by the recent Supreme Court decision in United States v. Windsor, 2013 U.S. LEXIS 4921 (2013).
In establishing a nationally uniform rule, the Revenue Ruling eliminates potentially serious administrative concerns employers and employee benefit plan administrators would have faced in the federal tax context if a "state of residence" rule had been adopted instead. Employers should note, however, that the ruling does not extend the same favorable tax treatment to registered domestic partnerships, civil unions or other similar formal relationships recognized under state law.
The IRS has also updated two sets of Frequently Asked Questions (FAQs). The set that applies to same-sex couples clarifies several employee benefit issues for employers. The other set applies to registered domestic partners and individuals in civil unions.
In Windsor, the Court struck down Section 3 of the Defense of Marriage Act (DOMA), which had denied federal benefits to same-sex couples, as a violation of the US Constitution's guarantee of equal protection under the law. As a result, married same-sex couples residing in states where same-sex marriages are legal became eligible for more than 1,000 federal benefits and protections linked to marital status. This new eligibility affects taxable wages, retirement accounts and qualified pension plans, among other benefits.
Same-Sex Health Insurance Benefits
In the Revenue Ruling, the IRS concludes that for purposes of the Internal Revenue Code (IRC), the terms "spouse," "husband and wife," and "husband" and "wife" will be interpreted to include same-sex spouses. Those terms will not include individuals in registered domestic partnerships, civil unions and other similar formal relationships recognized under state law. The IRS notes that this interpretation is gender-neutral and consistent with the Court's opinion in Windsor.
As a result, the value of same-sex spouse health insurance coverage purchased by legally married employees from their employers on an after-tax basis will now be treated as pre-tax and excludable from the employees' income. This will apply even to employees who live in states that do not recognize same-sex marriage. While most states follow the federal rules on tax exclusions, different tax treatment may still apply in states, and possibly municipalities, that do not recognize same-sex marriage. Accordingly, employers should watch for additional guidance from states and municipalities.
According to the IRS, all same-sex marriages legally entered into in any of the 50 states, the District of Columbia, a US territory or a foreign country are covered by the ruling. It also applies to all federal tax provisions where marriage is a factor. These include filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an Individual Retirement Account and claiming the earned income tax credit or child tax credit.
The IRS plans to issue procedures in the near future designed for employers that want to file refund claims for payroll taxes paid on previously taxed health insurance and fringe benefits provided to same-sex spouses. It also plans to issue additional 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 the revenue ruling. The IRS notes that other agencies also may publish guidance on other federal programs affected by the IRC.
Although the IRS will not begin applying the ruling until September 16, it may be relied on retroactively for purposes of filing original returns, amended returns, adjusted returns and claims for credits or refunds of employment and income taxes related to employer-provided health coverage and fringe benefits, so long as the statute of limitations for the earlier period has not expired.
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