On September 23, 2013, the Internal Revenue Service (IRS) released Notice 2013-61, which provides optional administrative procedures that employers may use to correct overpayments of employment taxes paid for 2013 and prior years with respect to same-sex spouse benefits. Notice 2013-61 comes as a result of the recent Supreme Court of the United States decision in United States v. Windsor. It also follows on the heels of Revenue Ruling 2013-17, which provided the IRS’s first guidance on the federal tax treatment of same-sex couples and spouses, including the Court ruling’s effect on employee benefit plans (as we discussed in our September 2013 blog post, “Early Guidance Sheds Light on Impact of United States v. Windsor on Employee Benefit Plans.”)
Revenue Ruling 2013-17 confirmed that as long as the period of limitations on refund claims is still open (years 2010, 2011, and 2012 for most taxpayers), employers that paid Social Security and Medicare taxes paid under the Federal Insurance Contributions Act (FICA) may file refund claims to recover those taxes. Affected employees may file for income tax refund claims with respect to the following benefits that were treated as taxable when provided by the employer to the employee’s same-sex spouse:
health plan coverage;
qualified tuition reductions;
meals and lodging furnished to the employee for the convenience of the employer;
dependent care assistance;
retirement planning services; and
on-premises gym facilities.
Revenue Ruling 2013-17 also made clear—and Notice 2013-61 confirms—that refunds/adjustments may be claimed with respect to amounts that an employee paid on an after-tax basis for health benefits for a same-sex spouse, if the employer had a cafeteria plan and the employee made pre-tax salary reductions for his or her own coverage.
Normally, employers are required to file a Form 941-X for each calendar quarter for which a refund or adjustment is made. The IRS promised future “streamlined” guidance for employers, which the IRS provided in Notice 2013-61, as described below.
Third Quarter 2013
If an employer withheld FICA and federal income taxes for same-sex spouse benefits in the third quarter of 2013 (July 1 – September 30) and repays the affected employees for the amount of such taxes before filing the third quarter 2013 Form 941 (due October 31, 2013), the employer need not report the wages and withholding on the third quarter 2013 Form 941. If, however, the employer does not repay the affected employees before filing the third quarter 2013 Form 941, the employer must report the withholdings on that return and can use one of the special procedures described below (or the normal procedures) to make an adjustment or claim a refund for the overpayment.
Special Procedures for 2013
Employers may take one of the following courses of action.
Use the fourth quarter 2013 Form 941 to correct/adjust FICA and federal income tax withholdings for all of 2013 (but only if the employer reimburses the employee for all FICA and federal income tax that was overwithheld in 2013 by December 31, 2013).
File one Form 941-X for the fourth quarter of 2013 to correct all 2013 FICA tax overpayments. The employee must be reimbursed for the overwithheld FICA before the employer can file the Form 941-X, and the employer must secure a written statement confirming that the employee has not claimed, and will not claim, a refund of the overpaid FICA tax (or, for refund claims, secure consents from employees that the employer may obtain a refund claim on the employees’ behalf).
Prior Year Overpayments
Employers can make a claim or adjustment for FICA taxes for the entire year on one Form 941-X filed for the fourth quarter of the year if the period of limitations on refunds has not expired and, in the case of adjustments, if the statute of limitations will not expire within 90 days of filing the adjusted return. Employers must first repay any overwithheld amount to the employee and secure a written statement confirming that the employee has not claimed, and will not claim, a refund of the overpaid FICA tax (or, for refund claims, secure consents from employees).
Notice 2013-61 states that if an employer files a claim for a refund or credit of FICA taxes for a prior year, the employer must provide amended Forms W-2 to its employees. But the guidance does not require that amended Forms W-2 be provided in the absence of filing for a refund or credit.
Revenue Ruling 2013-17 only requires an employer to start treating same-sex spouses as married beginning on September 16, 2013—the day the ruling was effective. An employer may choose to apply Revenue Ruling 2013-17 retroactively, as long as it does so consistently. That means that employers may choose to correct or adjust income tax and FICA tax withholdings for periods before September 16, 2013, using the procedures outlined above or the normal refund process, but they are not required to. The following points are also noteworthy.
The administrative procedures described above are optional. Employers that prefer to use the normal refund process may do so.
Consistent with the normal adjustment/refund rules, employers cannot adjust or refund income tax withholding for prior years (unless the overpayment is attributable to an administrative error). Rather, employees will need to file amended income tax returns to obtain income tax refunds for prior years.
Employers must take the applicable Social Security wage base into account. This means that if, after excluding the value of same-sex spouse benefits, the remaining Social Security wages are over the wage base, no adjustment of Social Security tax may be made for that employee.
Notice 2013-61 provides additional instructions on how the Forms 941/Forms 941-X should be completed (e.g., by writing “WINDSOR” across the top, only showing Windsor corrections on the Form 941-X, etc.)
Additional details are in Notice 2013-61.
Co-author, Kesia M. Brown, is a 2013 graduate of the University of Pennsylvania Law School and is currently awaiting admission to the state bar of Virginia.