September 13, 2013
Federal Tax Law Recognizes All Legal,
Same-Gender Marriages Regardless of
Where Couples Live
The Treasury Department and the Internal Revenue Service (IRS, which is used hereafter to represent both federal agencies) have released guidance implementing, for federal tax purposes, United States v. Windsor, the U.S. Supreme Court decision invalidating part of the Defense of Marriage Act.1 The guidance consists of Revenue Ruling 2013-172 and two sets of answers to frequently asked questions.3 The guidance takes effect on September 16, 2013, the date that Revenue Ruling 2013-17 will be published in the Internal Revenue Bulletin.
The Revenue Ruling resolves one of the key issues left open by the Windsor decision — whether the legality of a same-gender marriage is determined under the law of the state in which the marriage occurred (the “celebration rule”) or the law of the state in which the couple lives (the “residence rule”) — by adopting the celebration rule, and answers a number of specific questions primarily related to individual tax filings. The other key issue — whether Windsor will be applied retroactively — is still to be addressed, as are many other questions. As a result, the new guidance, while extremely helpful, should be viewed as just the first installment of guidance that the IRS expects to release which will include guidance on the retroactive impact of the Windsor decision for employee benefit plans and guidance on cafeteria plans. This Compliance Alert provides an overview of the new guidance and provides action steps for employers.4
Overview of the Guidance
Revenue Ruling 2013-17 states that the IRS will recognize same-gender marriages from any domestic or foreign jurisdiction having the legal authority to sanction marriages regardless of the state in which a couple lives. Thus, for federal tax purposes, couples who marry in one jurisdiction but live in, or move to, a state that does not license or otherwise recognize same-gender marriages will be treated the same as couples who live in a state that does license or otherwise recognize same-gender marriage. In reaching this conclusion, the IRS recognized that any other approach would raise significant administrative challenges for plan administration.
The Revenue Ruling also concludes that civil-union partners, domestic partners or those in similar relationships not denominated as a marriage under state law will not be treated as married for purposes of federal tax law.
Immediate Action Steps for Employers
While questions remain, particularly with respect to any retroactive effect of the Revenue Ruling, there are some action steps that employers should take immediately.
These are the immediate action steps for sponsors of health plans:
- Employers that currently provide health coverage to same-gender spouses must stop imputing income for federal tax purposes for that health coverage. If administratively feasible, this practice should stop by September 16, 2013. In addition, the employer should treat same-gender spouses as spouses for purposes of continued health coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) and special enrollment under the Health Insurance Portability and Accountability Act (HIPAA), also by September 16, 2013, if they are not doing so already on a voluntary basis.
- Employers that may be providing health coverage to same-gender spouses under the label “domestic partners” should take steps to determine if any of those couples are actually married. If the couple is legally married, the employer should stop imputing income and extend federal rights as discussed above.
- Employers should expect to get questions from participants about the amount of income imputed in previous years if those participants are planning to file amended federal income tax returns to claim a refund of excess income taxes. (Taxpayers may generally file a claim for a refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later.) The Revenue Ruling does not state if amended W-2 forms will have to be provided.
- Employers should evaluate whether they want to seek a refund of excess Social Security and Medicare taxes the employer paid in prior years, or an adjustment for the current year, with respect to health coverage provided to same-gender spouses. The IRS will be issuing a special administrative procedure on the filing of such claims.
- Employers should begin to review and update plan documents and enrollment-related communications/forms as needed.
These are the immediate action steps for sponsors of retirement plans:
- For purposes of the qualified plan rules, beginning September 16, 2013, employers must treat same-gender spouses as spouses under the plan regardless of the state in which the couple lives. If plans have previously made benefits such as pre-retirement annuity death benefits available to spouses in same-gender marriages and to the non-participant in civil unions or domestic partnerships without distinguishing between the types of relationships, employers should identify the individuals in same-gender marriages and begin to treat them as spouses under the plan.
- For plans subject to the qualified joint and survivor annuity (QJSA) requirements, employers must make the QJSA the automatic form of payment for a participant in a same-gender marriage and must obtain the same-gender spouse’s consent if the participant wishes to take his or her benefit in another form. In addition, if the participant dies before benefits commence, the plan must pay survivor benefits to the same-gender spouse and those benefits must be offered in the form of a qualified pre-retirement survivor annuity (QPSA).
- In profit-sharing and §401(k) plans not subject to the QJSA requirements, employers must treat same-gender spouses as the automatic beneficiary for death benefits under the plan, unless the same-gender spouse has consented to the designation of another beneficiary.
- Other circumstances in which employers must treat same-gender spouses as spouses include §415 limits, loans, hardship distributions, rollovers, survivor/death benefit required beginning dates, and qualified domestic relations orders.
- Employers should expect questions from participants about the retroactive application of the guidance. For matters relating to qualified plans, the Revenue Ruling is effective only prospectively and employers might wish to consult with their their attorneys about responding to these questions.
- Employers should begin to review plan documents, communications, forms and administrative procedures to determine what changes are needed. As the end of the year approaches for calendar-year plans, employers might wish to consider, in consultation with their attorneys, whether they should make certain amendments (e.g., amendments to clarify plan definitions) now, or wait for future guidance and whether it might be advisable to proactively solicit information to help ensure compliance with the Revenue Ruling (e.g., request updated beneficiary designations from all participants).
Future Guidance Expected
Most of the federal tax questions remaining for employers relate to whether, and if so to what extent, Revenue Ruling 2013-17 will be applied retroactively. As noted above, the IRS has stated that it intends to issue guidance on this key question and on other specific issues such as cafeteria plans. While there is no indication of when this guidance will be made available, the IRS also has stated that the future guidance will allow time for employers to make any amendments and/or corrections that might be required as a result of the guidance.
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As with all issues involving the interpretation or application of laws and regulations, employers should rely on their attorneys for authoritative advice on the Treasury/IRS guidance on same-gender married couples. Sibson can be retained to work with employers and their attorneys on compliance with the guidance.
- For background information on United States v. Windsor and its implications for benefit plans, see Sibson Consulting’s July 2013 Bulletin, “What the U.S. Supreme Court’s DOMA Decision Means for Benefit Plans.” (Return to the Compliance Alert.)
- Revenue Ruling 2013-17 is available on the IRS website. (Return to the Compliance Alert.)
- The Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law and Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions are on the IRS website. (Return to the Compliance Alert.)
- This Compliance Alert discusses guidance from the IRS relating to the federal tax consequences of the U.S. Supreme Court’s Windsor decision. It is important to remember that other agencies, and in some instances, the courts, also will be interpreting the decision and providing guidance that might have an impact on employee benefit plans. (Return to the Compliance Alert.)
Compliance Alert, Sibson Consulting’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.