IRS Announces Recognition of Same-Sex Marriage for All Federal Tax Purposes under “State of Celebration” Approach
The IRS announced in Revenue Ruling 2013-17 that same-sex couples who are legally married in any state or other jurisdiction that recognizes same-sex marriages (including the District of Columbia, a U.S. territory or a foreign country) will be treated as married for all federal tax purposes, even if the couple lives in a jurisdiction that does not recognize same-sex marriages. Participants in marriage-equivalent relationships (i.e., domestic partnerships and civil unions) will not be recognized as married for federal tax purposes. The IRS also released updated Frequently Asked Questions for taxpayers in same-sex marriages and marriage-equivalent relationships, and for employers who sponsor qualified retirement plans and health and welfare plans.
This guidance comes in the wake of the U.S. Supreme Court’s decision in U.S. v. Windsor, which struck down as unconstitutional section 3 of the Defense of Marriage Act (“DOMA”). DOMA prohibited the federal government from recognizing an otherwise valid marriage between two persons of the same sex. As our July 2013 Benefits Report explains, Windsor raised more questions than it answered with respect to employee benefit plans. The IRS ruling provides a clear answer to many of those questions. Additional guidance is planned, and guidance on non-tax issues affecting employee benefit plans is expected from other federal agencies.
Impact on Plan Interpretation and Administration
As a result of the IRS ruling, plan sponsors must treat all individuals in same-sex (and opposite-sex) marriages as married for all federal tax purposes, effective as of September 16, 2013. Below is a brief description of the impact of this ruling on employee benefit plans.
Revenue Ruling 2013-17 will require qualified retirement plans to:
- Provide a qualified joint and survivor annuity and/or a qualified optional survivor annuity to all participants in same-sex marriages, if the plan is subject to the QJSA rules
- Provide a qualified preretirement survivor annuity to a married participant’s same-sex surviving spouse, if the plan is subject to the QJSA rules (optionally, a plan may provide a pre-retirement survivor annuity to a participant’s beneficiary, including a surviving domestic partner)
- Require the consent of a participant’s same-sex spouse to the participant’s election of an optional form of benefit (and not require such consent in the case of an unmarried participant, including a participant in a domestic partnership or civil union)
- Require the consent of a participant’s same-sex spouse to the participant’s designation of a non-spouse beneficiary (optionally, a plan may also require the consent of a domestic partner)
- Require the consent of a participant’s same-sex spouse to a loan from certain retirement plans (optionally, a plan may also require the consent of a domestic partner)
- Recognize a same-sex spouse as a spouse for purposes of safe-harbor hardship distribution rules
- Follow a qualified domestic relations order awarding benefits to a participant’s same-sex former spouse
- Recognize a same-sex spouse as a spouse for purposes of the required minimum distribution rules and minimum distribution incidental benefit rules
- Permit same-sex surviving spouses to elect a direct rollover to an eligible retirement plan or IRA (not just an “inherited IRA”)
In addition, health and welfare plan sponsors may:
- Stop imputing income for the value of employer-paid health coverage provided to an employee’s same-sex spouse and permit pre-tax payroll contributions through a cafeteria plan for an employee’s share of the cost of group health coverage provided to his or her same-sex spouse
- Make adjustments for income tax withholding that was over-withheld from an employee during the current year (employees may claim refunds of federal taxes paid on previously imputed income and after-tax employee contributions for all open years prior to the current year, (i.e., generally the past three years)
- File an amended payroll tax return to claim a refund of the employer portion (and employee portion if the employee’s whereabouts are known) of Social Security and Medicare taxes paid on previously imputed income and after-tax employee contributions for all open years
- Permit reimbursement of qualifying medical expenses of an employee’s same-sex spouse (and spouse’s children) from Health Flexible Spending Accounts (“Health FSAs”) and Health Reimbursement Accounts (“HRAs”)
- Permit reimbursement of qualifying dependent care assistance expenses for an employee’s eligible disabled same-sex spouse or the same-sex spouse’s child under a Dependent Care Assistance Program (“DCAP”)
Open Questions to be Addressed in Future Guidance
This ruling only addresses legal issues over which IRS has regulatory authority. The IRS intends to issue future guidance regarding the retroactive effect of the Windsor decision, including a special procedure that employers can follow to claim refunds of payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses.
In addition to further IRS guidance, we anticipate additional guidance on non-tax issues from other agencies, including the Department of Labor (“DOL”), Department of Health and Human Services (“HHS”) and Centers for Medicare and Medicaid Services. The DOL Wage and Hour Division recently updated Family Medical Leave Act Fact Sheet 28F to recognize same-sex marriages that are valid in the employee’s state of residence. On August 29, HHS announced that an individual who is enrolled in a Medicare Advantage plan will have equal access to coverage in a nursing home where his or her same-sex spouse lives.
Issues not addressed by the ruling include:
- Whether the recognition by the IRS of a participant’s same-sex marriage is a permitted election change event under Code Section 125 that would allow an employee to elect mid-year to (a) enroll his or her spouse in an employer-sponsored health and welfare plan or change benefit options, or (b) increase contributions to a Health FSA or DCAP
- Whether and the extent to which certain ERISA-required disclosures must be provided to a plan participant’s same-sex spouse or former spouse
- Whether plans covering only a business owner and his or her same-sex spouse are subject to ERISA
Please contact any of the attorneys at Trucker Huss if you have questions concerning the IRS ruling or the impact of the Windsor decision.