Yesterday the U.S. Department of Treasury and the Internal Revenue Service (IRS) announced that, as a result of the holding in U.S. v. Windsor that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional, the determination of whether a same-sex couple is legally married for federal tax purposes will be based on the “place of celebration” and not the couple’s place of residence.
Thus, for purposes of federal tax laws, it will not matter if a married same-sex couple resides in a state where same-sex marriages are not recognized, as long as the couple was legally married in a jurisdiction where such marriages are permitted. For example, if a couple who resides in Pennsylvania travels to and gets married in New York, that couple is legally married for federal tax purposes despite the fact that Pennsylvania (their place of residence) does not recognize same-sex marriages. The new rules are set forth in Revenue Ruling 2013-17.1 Links to the ruling and to two FAQs on the subject issued by the IRS are below.
This ruling will affect most employee benefit plans. With respect to welfare benefit plans:
- employers will no longer need to impute income to an employee if the employee’s same-sex spouse is covered under the employer’s group health plan and may treat any after-tax salary deduction election made by a participant to pay for the same-sex spouse’s coverage under the employer group health plan as a pre-tax salary reduction election
- qualifying medical expenses incurred by the non-employee same-sex spouse may be eligible for tax-free reimbursement under flexible spending arrangements, health reimbursement arrangements and health savings accounts
- a non-employee same-sex spouse covered under an employee spouse’s group health plan is a “qualified beneficiary” and may elect COBRA continuation coverage upon a “qualifying event,” and
- an employee may make a mid-year election to add a his or her legally married same-sex spouse to the employee’s health plan coverage if the spouse loses coverage under another plan, to the same extent as applies to opposite-sex spouses.
With respect to qualified retirement plans:
- a same-sex spouse of an employee covered by an employer’s plan will have the rights of a surviving spouse (e.g., the right to receive a survivor annuity and the right to consent to forms of payment and beneficiary designations under a pension plan)
- in the event of divorce, a same-sex spouse can be assigned a portion of the participant-spouse’s benefit through a qualified domestic relations order (QDRO)
- a same-sex spouse can roll over a deceased participant’s plan benefit to his or her own IRA or employer plan account
- a same-sex spouse will be permitted to delay receipt of a deceased participant’s benefit under the minimum required distribution rules, and
- a participant will be permitted to receive a hardship withdrawal from a defined contribution plan (to the extent the plan generally permits hardship withdrawals) as a result of a same-sex spouse’s medical expenses, tuition costs and funeral expenses.
The IRS also announced that it intends to issue additional guidance setting forth streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. The IRS also intends 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 the ruling. This additional guidance may also cover the question of whether a health insurance plan linked to a cafeteria plan can permit a non-employee same-sex spouse to enter the plan in 2013 as a “change in status.”
It is important to note that this ruling does not affect the status of same-sex couples who have entered into registered domestic partnerships, civil unions or other similar formal relationships recognized under state law. Unless that couple is legally married in a jurisdiction that permits same-sex marriage, the same-sex partner of the participant will not be considered a spouse for purposes of federal tax law, including taxes relating to employee benefit plans.
This ruling does not control whether states that do not recognize same-sex marriage will pass along similar tax treatment for purposes of state and local income taxes.
Employers should review the administration and operation of their employee benefit plans and payroll systems to determine and implement necessary changes. For example:
- employers should cease withholding federal income and employment taxes on amounts paid by employees for coverage of same-sex spouses under the employer’s group health plan and consider whether to adjust payroll withholding prospectively, so that the employee spouse can recover overpaid federal income and FICA taxes withheld on imputed income in 2013 to date
- employers should consider whether to seek refunds of employer and employee FICA paid on imputed income for open tax years
- reimbursement of qualifying medical expenses incurred by the same-sex spouse of an employee from flexible spending arrangements, health reimbursement arrangements and health savings accounts should be permitted, and
- plan administrators should review retirement plan beneficiary designations of participants with same-sex spouses and, if necessary, either change the beneficiary designation to the same-sex spouse, or require that the participant obtain the consent of the same-sex spouse to the non-spouse beneficiary designation.
Links to Ruling and FAQs
If you have any questions regarding this ruling, or any other related issues, please contact the Pepper attorney you generally work with, or one of the authors of this Client Alert.
1 The holding of Revenue Ruling 2013-17 takes effect on September 16, 2013. However, taxpayers and employers may rely on the ruling prior to that date.
Michael A. Kadlec, Andrew J. Rudolph and Jonathan A. Clark
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Internal Revenue Service rules require that we advise you that the tax advice, if any, contained in this publication was not intended or written to be used by you, and cannot be used by you, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.