United States: IRS Provides Some Guidance On Federal Tax Matters For Same-Sex Marriage

Reprinted with permission from Employee Benefit Review - November 2013

Earlier this year, in the case of U.S. v. Windsor, the US Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA). Under Section 3 of DOMA, the definitions of "marriage" and "spouse" had been limited to a union between one man and one woman. Section 3 was struck down by the Court on the basis that it violated the equal protection principles of the Fifth Amendment to the U.S. Constitution.

This action by the Supreme Court Raised numerous issues under multiple federal laws for which guidance is necessary from many governmental agencies. One of the first agencies to respond to the issues was the Internal Revenue Service (IRS). The agency released Revenue Ruling 2013-17, which took effect on September 16, 2013, along with two sets of questions and answers that provide some guidance related to tax issues for same-sex married couples, as well as addressing other same-sex relationships. The guidance will impact an employer's administration of its employee benefit plans.

IRS POSITION

In its guidance, the IRS set out its position that, for federal tax purposes, couples with a valid same-sex marriage will be treated the same as couples with a valid opposite-sex marriage, regardless of where the same-sex marriage couple currently reside or are domiciled. In other words, for federal tax purposes a valid same-sex marriage will be recognized, even if the marriage would not be recognized in the state in which the spouses currently reside or are domiciled. The IRS also provided, however, that this tax treatment does not apply to registered domestic partners, individuals in civil unions, or other forms of recognized relationships that have developed under the laws of different states, but which are not classified as marriage under state law.

IMPACT ON EMPLOYER'S RETIREMENT PLANS

Since DOMA was in effect, employers did not (and in many cases could not) treat same-sex spouses as legitimate spouses under the employer's benefit plans. This guidance changes the employer's ability to treat such marriages differently for federal tax purposes. Although the IRS has indicated that additional guidance will be forthcoming to help guide employers, beginning September 16, 2013, same-sex married partners must be treated the same as opposite-sex married partners "for purposes of satisfying the federal laws relating to qualified retirement plans." At the very least an employer should review and update its procedures with respect to retirement-plan provisions related to spouses. Such impacted provisions include:

Employers also should review their qualified domestic relations order procedures, which will now apply in the case of same-sex married participants who divorce.

IMPACT ON EMPLOYER HEALTH PLANS

With respect to welfare benefit plans, employers will no longer need to impute income for federal tax purposes when a nondependent same-sex spouse is covered under the group health plan. In addition, the guidance provides that for open tax years the employer can seek certain refunds for taxes paid on imputed amounts for married same-sex participants (impacted employees also can seek refunds). State law may provide for different tax treatment of these amounts going forward, so further examination of how the payroll department is treating income is warranted. Continuation coverage under COBRA also will need to be offered to same-sex spouses who experience a qualifying event with respect to an employer group health plan. Special enrollment rights under a group health plan are also available with respect to a same-sex spouse.

One interesting result of the guidance is the impact on same-sex spouses under health savings accounts (HSA). The ruling actually results in less favorable treatment. Prior to the changes each member of the marriage was allowed the full HSA deduction limit. Now such spouses must share that limit.

The ruling also has an impact on reimbursement under health care flexible spending accounts and health reimbursement accounts. Employees may now seek reimbursement for their same-sex spouse's qualifying expenses, even if the spouse is not a dependent. This had not been the case prior to the Supreme Court's decision.

SUMMARY

The repeal of Section 3 of DOMA raised many critical tax issues for same-sex spouses as well as for employee benefit plans. The IRS's initial guidance will help employer's determine their responsibilities to employees in valid same-sex marriages with respect to those benefit plan matters. Although more guidance is needed, employers can address certain employee tax matters with confidence, and same-sex married employees can be treated, for federal purposes at least, like opposite-sex spouses going forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.