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IRS Recognizes Same-Sex Marriages for Pretax Benefits

Ruling extends pretax treatment to same-sex spouses' health insurance coverage in all 50 states

last updated 4/8/2014

Compliance Updates:​

In September 2013, the IRS issued Notice 2013-61, providing special administrative procedures for employers to correct overpayments of employment taxes for 2013 and prior years with respect to certain same-sex spouse benefits, including overpayments that result from a taxpayer's retroactive application of the holdings of Revenue Ruling 2013-17.

In December 2013, the IRS updated its FAQs for Individuals of the Same Sex Who Are Married Under State Law with new questions and answers that further clarify how employers administer their plans, including reimbursing an employee for an overpayment of Social Security and Medicare taxes and income tax withholding with respect to same-sex spouse benefits.

Additionally, in Notice 2014-1, issued on Dec. 16, 2013, the IRS clarifies certain questions regarding the way in which the rules governing cafeteria plans, flexible spending accounts (FSAs) and health spending accounts (HSAs) should be applied in situations involving same sex spouses, according to an alert by law firm Ford & Harrison LLP.

IRS Notice 2014-19 provides further guidance for qualified retirement plans about the treatment of marriages of same-sex couples. The notice calls for a retirement plan to be amended if it defines “spouse” only as a person of the opposite sex.

Under a new Internal Revenue Service ruling, employees who pay for employer-provided health insurance for their same-sex spouse may treat these costs as excludable from federal income taxes, even if they live in a state that doesn't recognize their marriage. State income taxes are another matter, however.

The U.S. Department of the Treasury and the IRS ruled on Aug. 29, 2013, that same-sex couples who were legally married will be treated as married for federal tax purposes, including the pretax treatment of a spouse's health insurance coverage, in all 50 states and the District of Columbia. Revenue Ruling 2013-17 applies, in other words, regardless of whether the couple now live in a state that recognizes same-sex marriage or a state that does not recognize same-sex marriage.

This is being referred to as the "state of commitment" standard, with federal rights and benefits for same-sex couples based on where their marriage was performed as opposed to their current "state of residence."

The ruling implements federal tax aspects of the Supreme Court's June 26 decision in United States v. Windsor, which invalidated a key provision of the 1996 Defense of Marriage Act.

Revenue Ruling 2013-17 applies to all federal tax provisions in which marriage is a factor, including filing status, claiming personal and dependency exemptions, employee benefits, and claiming the earned income tax credit or child tax credit.

The ruling covers same-sex marriages entered into in one of the U.S. jurisdictions where such marriages are recognized as legally valid (sometimes referred to as the "state of celebration," as opposed to a couple's state of residency), as well as legal marriages performed in a foreign country. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

In addition, the U.S. Department of Labor's Employee Benefits Security Administration (EBSA) issued Technical Release No. 2013-04 on Sept. 18, 2013, stating that in general the terms “spouse” and “marriage” in Title I of the Employee Retirement Income Security Act (ERISA) and in related department regulations should be read to include same-sex couples legally married in any state or foreign jurisdiction that recognizes such marriages, regardless of where they currently live. According to an alert from Buck Consultants, EBSA indicates its intent to issue future guidance on specific ERISA provisions and regulations.

Employee Benefits Affected

Under the IRS ruling, same-sex couples will be treated as married for all federal tax purposes. Those who purchased same-sex spouse health insurance coverage from their employer on an after-tax basis may treat the costs of that coverage as pretax and excludable from income (for federal income tax purposes; state income taxes may still apply).

"Same-sex spouses legally married anywhere no longer are taxed on health benefits coverage for their spouses and can pay premiums pretax, even if they live in a non-recognition state such as Florida, Texas, etc. This is a huge development and a relief for these employers and employees," Todd Solomon, a partner in the employee benefits practice group of McDermott Will & Emery LLP in Chicago, told SHRM Online.

"However, state taxation of benefits may continue to be quite complex, although it remains to be seen how states will treat this," Solomon added. "On the flip side, the guidance may not be welcome for employers who currently do not offer same-sex partner benefits because now they are legally required to offer benefits to same-sex spouses in all states" (see box below).

Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously taxed health insurance and other benefits provided to same-sex spouses. Treasury and IRS also intend to issue further 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 Revenue Ruling 2013-17.

Other agencies may provide guidance on federal programs they run that are affected by the Internal Revenue Code, Treasury said.

Are Employers Obligated to Provide Equal Treatment?

Are employers located in states that do not recognize same-sex marriage now required to grant access to health care benefits to the spouses of employees in legal same-sex marriages (entered into elsewhere), if they grant health benefits to spouses in opposite-sex marriages?

"This is an open question, and only time and legal challenges—which there are certain to be—will tell," commented Todd Solomon of McDermott Will & Emery LLP.

Employers are not "required" to offer medical plan coverage to same-sex spouses the way they are required to offer a qualified joint and survivor annuity (QJSA) and a qualified preretirement survivor annuity (QPSA) in a pension plan because there are no similar statutory benefit mandates in the welfare plan context, Solomon explained. However, "employers that do not cover same-sex spouses will be very vulnerable to discrimination claims, in particular sex discrimination under Title VII. State and local discrimination claims are also possible, but private sector employers can likely argue that these claims are preempted by ERISA. But ERISA does not preempt Title VII."

While Title VII does not protect against sexual orientation discrimination, Solomon pointed out that guidance from the Equal Employment Opportunity Commission suggests that it might interpret this type of exclusion of same-sex spouses as sex discrimination, and therefore "an employer denying coverage to a same-sex spouse will be at risk for having to defend a costly sex discrimination lawsuit."

Proof of Marriage

"Proof of marriage that may be required by employers should be the same for all marriages," according to an alert from law firm Blank Rome LLP. "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 percent of employees falsely claim individuals to be their spouses and dependents and a periodic audit may save the employer significant funds," the firm advised.

"The employer will determine whether a participant has been married in another state in the same manner as opposite-sex marriages are currently determined, such as by obtaining a copy of the marriage license," statesan alert from law firm Warner Norcross & Judd LLP. "Because same-sex spousal rights are new, though, we suggest that employers communicate the changes to employees and ask them to disclose any spouses not previously identified."

Retroactive Application and Refund Claims

The IRS set a prospective effective date for the ruling of Sept. 16, 2013. Legally married same-sex couples must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status.

For prior tax years still open under the statute of limitations, individuals who were in same-sex marriages may opt to file original or amended returns choosing to be treated as married for federal tax purposes. Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011, and 2012. Some taxpayers may have special circumstances (such as signing an agreement with the IRS to keep the statute of limitations open) that permit them to file refund claims for tax years 2009 and earlier.

With respect to retroactivity for prior years, "employers are still in wait-and-see mode until the IRS issues further guidance," said Solomon. "What we know is that employees and employers have the right—but not the obligation—to file for refund claims on past taxes paid on same-sex spouse benefits in open tax years—typically 2010, 2011, and 2012."

"Employers can expect to get requests from employees for corrected Form W-2s from these prior years," Solomon noted. "But what is not clear yet is how to handle cafeteria plan participation and tax reporting for prior years and whether adjustments need to be made. The IRS will be issuing more guidance on this issue as well as the retroactive impact of the guidance on retirement benefits that have or in many cases have not been paid to same-sex spouses."

Along with Revenue Ruling 2013-17, the IRS released two related sets of frequently asked questions and answers:

    Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law.

      Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions.

        The IRS ruling "assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change,” Treasury Secretary Jacob J. Lew noted in a released statement.

        Stephen Miller, CEBS, is an online editor/manager for SHRM.

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