As discussed in my previous blogs, the Internal Revenue Service (the “IRS”) has issued guidance, including Revenue Ruling 2013-17, on the treatment of same-sex couples for federal tax purposes after the Windsor case. Windsor struck down the prohibition in section 3 of DOMA on recognizing the validity of same-sex marriage. Generally, the guidance indicates that a same-sex marriage entered into in a state, which recognizes the marriage as being valid, will be treated as a valid marriage for federal tax purposes (even if the couple resides in a state that does treat a same-sex marriage as valid). FAQs issued by the IRS as part of this guidance describe the effect of Windsor on employee benefits governed by federal tax rules. Here is what the FAQs say:
Health Care Coverage
FAQs # 10 to #14 indicate that an employee may now file an amended Form 1040, for all open tax years, to claim a refund for federal income taxes paid on health care coverage afforded to the employee’s same-sex spouse at work (under a cafeteria plan or otherwise). Further, the employer may now claim a refund, by filing Form 941-X for any open tax year, for the social security taxes and Medicare taxes paid on a same-sex spouse’s health care coverage. However, if the employer cannot locate the employee after making reasonable efforts, the employer may claim a refund for the employer portion (but not the employee portion) of those taxes. The IRS will soon issue a special administrative procedure by which an employer may make the refund claims for the social security and Medicare taxes.
The foregoing FAQs indicate that the employer may not claim a refund for income tax withheld on the same-sex spouse’s health care coverage provided prior to 2013. Employers may make adjustments for income tax withholding on such coverage provided in 2013, if the employer pays the overwithheld amount to the employee before the end of the year.
FAQ # 16 states that qualified retirement plans are required to comply with the following rules pursuant to Revenue Ruling 2013-17:
1. A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.
2. For purposes of satisfying the federal tax laws relating to qualified retirement plans, a qualified retirement plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.
3. A person who is in a registered domestic partnership or civil union is not considered to be a spouse for purposes of applying the federal tax law requirements relating to qualified retirement plans, regardless of whether that person’s partner is of the opposite or same sex.
FAQ # 17 has the following examples:
1. Plan A, a qualified defined benefit plan, is maintained by Employer X, which operates only in a state that does not recognize same-sex marriages. Nonetheless, Plan A must treat a participant who is married to a spouse of the same sex under the laws of a different jurisdiction as married for purposes of applying the qualification requirements that relate to spouses.
2. Plan B is a qualified defined contribution plan and provides that the participant’s account must be paid to the participant’s spouse upon the participant’s death unless the spouse consents to a different beneficiary. Plan B does not provide for any annuity forms of distribution. Plan B must pay this death benefit to the same-sex surviving spouse of any deceased participant. Plan B is not required to provide this death benefit to a surviving registered domestic partner of a deceased participant. However, Plan B is allowed to make a participant’s registered domestic partner the default beneficiary who will receive the death benefit unless the participant chooses a different beneficiary.
FAQs # 18 and # 19 say that qualified retirement plans must comply with these rules as of Sept. 16, 2013, but only on a prospective basis, in the absence of IRS guidance on retroactive application. The IRS does intend to issue further guidance on same-sex marriages and their affect on retirement plans.