IRS Guidance On Same-Sex Marriage: Employee Benefit Considerations

In response to the Supreme Court decision in United States v. Windsor, 133 S. Ct. 2675 (2013), the Internal Revenue Service issued Revenue Ruling 2013-17 (Ruling) on August 29, 2013, in which the IRS set forth the following federal tax principles: 

  • "Spouse" requires a lawful marriage.  The term "spouse" (also husband/wife) includes "an individual married to a person of the same sex if the individuals are lawfully married under state law."

  • State of celebration is controlling.  The IRS will recognize a "marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages."  This effectively adopts a state of celebration standard rather than a state of domicile.

  • No changes for domestic partnerships.  The term "spouse" (also husband/wife) does not include "individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state."

The IRS noted that, while states have different rules of marriage recognition, uniform nationwide rules are essential for efficient and fair tax administration.  The IRS emphasized that, due to our increasingly mobile society, a rule under which a couple's marital status could change simply by moving from one state to another would be prohibitively difficult and costly for the IRS to administer and for many taxpayers to apply.

Scope of Ruling

Under the ruling, gender-specific terms in the Internal Revenue Code will be interpreted in a gender-neutral manner unless the context indicates otherwise.  In a news release, the IRS stated that the "ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit."  The Ruling goes well beyond the estate tax refund that was at issue in Windsor

Affected taxpayers may rely on the Ruling for the purpose of filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax resulting from the holdings in the Ruling, provided the applicable limitations period has not expired.  The statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. 

In addition, the IRS has updated its FAQs for: (1) Individuals of the Same Sex Who Are Married Under State Law, and (2) Registered Domestic Partners and Individuals in Civil Unions.

Qualified Retirement Plans

The IRS expressly stated that the Ruling's three holdings discussed above apply to qualified retirement plans.  Accordingly, for the present,  plan sponsors and administrators should consider the following as applicable to qualified retirement plans:

  • QJSAs and QPSAs: For defined benefit plans and certain defined contribution plans, automatic spousal benefits, such as a qualified joint and survivor annuity (QJSA) for married participants who retire, and a qualified preretirement survivor annuity (QPSA) for participants who die before retirement should be provided to same-sex spouses.  Such benefits may only be waived with the consent of the same-sex spouse.

  • Default Beneficiaries: For defined contribution plans not subject to the QJSA and QPSA requirements, including most 401(k) plans, a same-sex spouse must be treated as the default beneficiary, and the same-sex spouse must consent to the participant's designation of any other beneficiary.

  • Required Minimum Distributions: A same-sex surviving spouse may delay taking required minimum distributions until the end of the year in which the participant attains age 70 1/2. 

  • QDROs: A same-sex spouse may receive a portion of the participant-spouse's accrued benefit or plan account under a qualified domestic relations order (QDRO) issued pursuant to the dissolution of the same-sex marriage.

  • Rollovers: A same-sex spouse of a deceased participant may make rollovers to another employer's eligible retirement plan or to a personal or inherited individual retirement account (IRA), as opposed to only an inherited IRA for nonspouse beneficiaries.

  • Hardship Withdrawals: Hardship withdrawals must be available based solely on the same-sex spouse's marital status to the participant, as opposed to the individual's status as the participant's designated beneficiary under the plan or the participant's dependent.

  • Spousal Consent for Plan Loans and Hardship Withdrawals: In addition to the spousal consent requirements discussed above, plan administrators should obtain the consent of the same-sex spouse if the plan requires spousal consent when a participant requests a plan loan or hardship withdrawal.

  • Future Guidance: Regarding the implication of Windsor on qualified retirement plans, the IRS has stated that future guidance will address: (1) plan amendment requirements, including the timing of any required amendments, and (2) any necessary corrections relating to plan operations for periods before the issue date of future guidance.

Welfare Benefit Plans

Plan sponsors and administrators should consider the following with respect to welfare benefit plans and arrangements: 

  • Cafeteria Plans: If an employee made a pre-tax salary-reduction election for health coverage under a cafeteria plan sponsored by an employer and also elected to provide health coverage for a same-sex spouse on an after-tax basis under a group health plan sponsored by that employer, an affected employee may treat the amounts that were paid by the employee for coverage of the same-sex spouse as pre-tax salary reduction amounts.  The IRS has stated that it will issue future guidance with respect to cafeteria plans.

  • Employer-Provided Health Coverage and Fringe Benefits: Taxpayers may rely on the Ruling retroactively with respect to employee benefits only for purposes of filing their original, amended or adjusted tax returns, or claiming refunds of any tax overpayments of tax under Code Section 106 (contributions by employers to accident and health plans), 117(d) (qualified tuition reduction), 119 (meals or lodging), 129 (dependent care assistance programs), or 132 (certain fringe benefits) based on an individual's marital status.

  • Employer Payroll Tax Refunds: The IRS stated in its FAQs, cited above, that employers may claim a refund of, or make an adjustment for, excess social security and Medicare taxes paid if the period of limitations for filing a claim for refund is open.  The IRS also stated that a special administrative procedure for employers to file claims for refunds or make adjustments for excess social security and Medicare taxes will be provided in forthcoming guidance.

  • Income Tax Withholding and Imputation of Income: Employers cannot claim refunds of over-withheld income tax for prior years, but may make adjustments for income tax withholding that was over withheld from an employee in the current year, provided the employer repays or reimburses the employee for the over-withheld income tax before the end of the calendar year.  Employers will no longer be required to impute income to the employee where the employer pays premiums for certain welfare benefits, such as group health plan coverage, for the same-sex spouse of the employee.  Employees may file for refunds of income tax due for prior years, subject to the period of limitations. 

  • COBRA: A same-sex spouse should have the same rights as an opposite-sex spouse to elect continuation coverage.

  • Insured and Self-Insured Health Plans: Insured group health plans must comply with state insurance laws that may require coverage of same-sex spouses, domestic partners, and individuals in civil unions.  The Ruling does not limit the ability of the sponsor of a self-funded health plan to exclude from eligibility same-sex spouses, domestic partners, or individuals in civil unions.  However, such exclusions might expose plan sponsors to discrimination claims.

  • Health Flexible Spending Arrangements and Health Reimbursement Arrangements: Qualified medical expenses of same-sex spouses will be reimbursable for a health flexible spending arrangement or a health reimbursement arrangement without imputation of income.

  • Dependent Care Flexible Spending Arrangements: Care for same-sex spouses should be reimbursable without imputation of income if the other requirements of the dependent-care arrangement are met.

  • Health Savings Accounts: The joint limit applicable to married couples under health savings accounts should apply to same-sex couples.

September 16, 2013 Effective Date and Retroactive Application

The holdings in the Ruling will be applied prospectively as of September 16, 2013 - see the retroactive exception discussed above for employer-provided health coverage and fringe benefits.  The IRS noted that it intends to issue further guidance on the retroactive application of the Supreme Court's opinion in Windsor to cafeteria plans, qualified retirement plans and other tax-favored arrangements for periods before the effective date of the Ruling.
 

Practical Steps to Take Now

  • Review Plan Documents.  As we recommended in our prior update on this subject, a plan administrator should review its employee benefit plan documents to determine how "spouse" is defined, to determine if the definitions continue to accurately reflect the sponsor's intent, to verify that the definitions are consistent across all of its plans and with current law, and to identify all provisions that affect spouses.  The Ruling does not change the meaning of terms in plan documents; it merely changes the effect of the terms discussed above for federal tax purposes.

  • Refund or Adjust.  Employers should consider whether to file claims for refunds or make adjustments for excess social security and Medicare taxes paid on same-sex spouse benefits after the IRS issues its special administrative procedure.

  • Cafeteria Plan Concerns.  Cafeteria plan administrators should anticipate inquiries from employees who would like to change cafeteria plan elections immediately to cover same-sex spouses.  Midyear changes must be based on one of several exceptions, such as changes in family status.  While it appears likely that such midyear changes would be permissible, the Ruling does not address the issue.

  • Communicate. Plan administrators should consider preparing an employee communication that explains the benefits for same-sex spouses and addresses the spouses' consent issues regarding QJSAs, QPSAs, default beneficiaries, plan loans and hardship withdrawals discussed above.

  • Update Beneficiary Forms.  Plan administrators may wish to request that affected participants update their beneficiary designation forms and obtain spousal consent where a nonspouse beneficiary was designated.

  • Uniform Documentation Rules.  To avoid claims of discrimination or disparate treatment, employers and plan administrators should apply uniform rules for documenting marital status that do not distinguish between same-sex and opposite-sex couples.