As discussed in Goodwin Procter’s July 8, 2013 Employee Benefits Update (the “July Update”), the U.S. Supreme Court’s ruling in the Windsor case that struck down Section 3 of the Defense of Marriage Act (“DOMA”) introduced numerous implications for retirement, health and other employee benefit plans. Recent guidance from the Internal Revenue Service (“IRS”) and the Department of Labor (“DOL”) clarify certain aspects of the Windsor ruling’s implementation.
On June 26, 2013, in U.S. v. Windsor, the Supreme Court struck down as unconstitutional Section 3 of DOMA, which provided that only opposite-sex marriages would be recognized as valid for federal law purposes. As a result, individuals who are spouses in a same-sex marriage that is recognized under applicable state law are considered to be married when applying federal statutes and regulations that refer to or involve marital status. As noted in the July Update, the Windsor ruling left a number of unanswered questions in the absence of further guidance.
State Law Recognition
The Windsor ruling did not specify whether a same-sex couple that is recognized as married in one state would continue to be considered married for federal law purposes if such couple moved or returned to a state that does not recognize same-sex marriage.
Revenue Ruling 2013-17 issued by the IRS, as well as Technical Release 2013-04 issued by the DOL, clarify that same-sex couples that are legally married in jurisdictions that recognize their marriages will be treated as married for purposes of federal tax rules and ERISA regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage. This guidance also clarifies that same-sex couples who have entered into a registered domestic partnership or other civil union, but who are not married, will not be treated as married for these purposes. The IRS and the DOL indicated that they intend to issue further guidance in this area in the future.
Qualified Retirement Plans
Qualified retirement plans must comply with Windsor and the IRS guidance as of September 16, 2013. The IRS has not yet issued any guidance regarding the applicable of Windsor to qualified retirement plans for periods before September 16, 2013 or the timing of any required plan amendments.
Retroactive Individual Federal Income Tax Claims
Revenue Ruling 2013-17 also provides retroactive relief with respect to individual federal income and employment taxes, permitting same-sex couples who would have qualified as married to file amended returns as a married couple and related claims for credits or refunds for tax years that are still open under the statute of limitations. The ruling requires that all items reported on an amended return that are affected by marital status be adjusted to be consistent with the amended return’s reported marital status.
Retroactive Claims by Employers
The Frequently Asked Questions released in connection with the ruling also provide that in addition to individuals seeking credits or refunds for past returns, employers may claim refunds for excess employment (i.e., Social Security and Medicare) taxes paid (e.g., with respect to imputed income for family health coverage). The IRS provided specific guidance in Notice 2013-61 for employers claiming refunds for excess employment taxes. The notice permits two special administrative procedures for correcting overpayment of employment taxes that result from an employer’s retroactive application of Revenue Ruling 2013-17.
Alternative 1 for 2013
Under the first alternative, employers may use the employer’s fourth quarter 2013 Form 941 to correct overpayments of income and employment taxes for the first three quarters of 2013. Employers must repay or reimburse the employees the amount of the over-collected income and employment taxes on or before December 31, 2013.
Alternative 2 for 2013
Under the second alternative, if an employer has not repaid or reimbursed the employee-paid portion of the over-collected employment taxes on or before December 31, 2013, such employer may file one Form 941-X for the fourth quarter of 2013 to correct overpayments of employment taxes for all quarters of 2013. With respect to the employee-paid portion of the tax, the employer must repay or reimburse the over-collected employment taxes prior to filing the amended form, and further must secure the employee’s written statement confirming that the employee has not made, and will not make, any separate claims for refund or credit of the over-collected employment taxes.
Guidance for Years Prior to 2013
Similarly, for each tax year prior to 2013 for which the applicable statute of limitations has not expired, employers may file one Form 941-X to cover all excess employment taxes paid for all four quarters of such year, provided that, with respect to the employee-paid portion of the tax, the employer has repaid or reimbursed the employees over-collected employment taxes prior to filing the amended form, and further provided that the employer has secured the employee’s written statement confirming that the employee has not made, and will not make, any separate claims for refund or credit of the over-collected employment taxes. Normally employers would need to file a Form 941-X for each quarter for which a refund claim or adjustment is made.
Employers who claim a refund or credit of employment taxes are also required to file Forms W-2c, Corrected Wage & Tax Statement. If they follow the special administrative procedures described above in filing Form 941-X, they should write “WINDSOR” in dark, bold letters across the top margin of page 1 of Form 941-X. Only corrections made under the special administrative procedures may be shown on the form marked with the Windsor case name.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.