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IRS Guidance: Employee Income Tax Correction for Same-Sex Spousal Health Coverage
 

By Stephanie Zorn © Jackson Lewis P.C  8/5/2014

On June 27, 2014, the IRS released Information Letter 2014-0012, which contains guidance for employees who have had the value of same-sex spousal coverage under employer health plans—which until recently was required to be included in gross income—reported on their Forms W-2.

Background

Historically, the employer cost of opposite-sex spousal coverage under employer-provided health plans is tax free (Treasury Regulations section 1.106-1), while the employer cost of same-sex spousal coverage resulted in taxable income to the employee. Further, the employee cost of opposite-sex spousal coverage could be paid for on a pre-tax basis through a cafeteria plan (I.R.C. section 125), while same-sex spousal coverage could only be paid for with after-tax dollars.

In its June 2013 United States v. Windsor decision, the U.S. Supreme Court declared Section 3 of the Defense of Marriage Act (DOMA)—which had prohibited the recognition of same-sex couples as spouses for federal tax law purposes—unconstitutional. Thereafter, the IRS issued guidance providing that same-sex spouses who were lawfully married under the law of any state—regardless of where those same-sex spouses resided—would be treated the same as opposite-sex spouses for federal tax purposes (Revenue Ruling 2013-17).

Subsequent IRS guidance clarified the tax treatment of the employer cost and the employee cost of same-sex spousal coverage: the former would not result in taxable income to the employee and the later could be paid on a pre-tax basis through a cafeteria plan (Notice 2014-1).

Information Letter 2014-0012

Information Letter 2014-0012 outlines two possible correction methods for an employee who has had the value of same-sex spousal health coverage reflected on a Form W-2:

Option One: The employee can ask the employer for a corrected Form W-2—that does not include the value of any excludable spousal health coverage in taxable wages—and use the corrected Form W-2 when filing the employee’s tax return.

Option Two: If the employer does not issue a corrected Form W-2, the employee can complete Form 4852 (Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) pursuant to the instructions contained the Information Letter and file it with a completed Form 1040 and the uncorrected Form W-2.

The Information Letter also advises employees that they may be entitled to a refund of federal employment taxes (social security and Medicare) paid on the value of excludable spousal health coverage and provides two possible refund methods:  an employer-sought refund and an employee-sought refund via Form 843 (Claim for Refund and Request for Abatement).

Key Take Away: Significantly, Information Letter 2014-0012 does not require employers to issue corrected Form W-2s or seek a refund of federal employment taxes. Accordingly, considerations of payroll department workload and employee relations can determine whether issuance of a corrected Form W-2 or the seeking of a refund is appropriate. Payroll departments who have not already done so should ensure their Form W-2 reporting and federal employment tax withholding aligns with Windsor and subsequent IRS guidance.

Stephanie O. Zorn is Of Counsel in the St. Louis office of Jackson Lewis, a labor and employment law firm. © 2014, Jackson Lewis P.C. All Rights Reserved. Reposted with permission.

Also see:​

SHRM Seeks Clarification on DOL Proposed Rule Defining ‘Spouse,’ SHRM Online Legal Issues, August 2014

More Post-Windsor Tax Guidance: IRS Issues Letter Outlining Steps for Individuals to Obtain Tax Refunds for Same-Sex Spousal Health Coverage, Proskauer’s ERISA Practice Center Blog, July 2014

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