IRS state-of-celebration rule for same-sex marriages – how it works, practicalities for employers

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The Internal Revenue Service has adopted a state-of-celebration rule that, for federal tax purposes, recognizes the validity of a same-sex marriage that was valid in the state where it was entered into, regardless of the married couple’s place of domicile.

The rule, which is contained in Revenue Ruling 2013‑17, responds to the US Supreme Court’s decision to strike down Section 3 of the Defense of Marriage Act in United States v. Windsor. The IRS ruling generally becomes effective on September 16, 2013.

This state-of-celebration rule is the same standard that has applied to common-law marriages since 1958.

The relevant provisions of the IRS ruling and its practical consequences are summarized below.

RECOGNIZING LAWFULLY MARRIED SAME-SEX COUPLES

Holdings. The IRS ruling held that for federal tax purposes:

  • the terms “spouse,” “husband” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes a marriage between individuals of the same sex
  • the IRS adopts a general rule recognizing 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 and
  • the terms “spouse,” "husband” and “wife” do not include individuals 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, and the term “marriage” does not include such formal relationships.

For purposes of the IRS ruling, the term “state” means any domestic or foreign jurisdiction having the legal authority to sanction marriages. Fourteen US jurisdictions currently allow same-sex marriage (California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington State, and Washington, DC), as do a similar number of foreign jurisdictions.

The IRS adopted a state-of-celebration rule – as opposed to a state-of-domicile rule – to avoid serious administrative concerns. For example, if the IRS had adopted a state-of-domicile rule, the need for and validity of spousal elections, consents and notices could change each time an employee, former employee or spouse moved to a state with different marriage recognition rules.

The IRS ruling will not apply for state tax purposes, unless a state expressly adopts it.

Effective date. The IRS ruling will be applied prospectively as of September 16, 2013.

Affected taxpayers may, however, rely on the IRS ruling to file original, amended or adjusted returns, or to claim a credit or refund for any overpayment of tax, provided that (1) the applicable limitations period for filing such claim under Section 6511 of the Code has not expired (generally, 2010 forward), and (2) all reportable items affected by the marital status of the taxpayer must be adjusted to be consistent with the marital status reported on the return or claim.  A taxpayer generally may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later.

Retroactive reliance on the IRS ruling is also permitted for purposes of filing original, amended or adjusted returns, or claims for credit or refund of an overpayment of tax, concerning employment and income tax with respect to employer-provided health coverage benefits or fringe benefits that are excludable from income based on an individual’s marital status under Sections 106 (employer contributions to accident and health plans), 117(d) (qualified tuition reduction), 119 (employer provided meals or lodging), 129 (dependent care assistance programs) or 132 (certain fringe benefits).

PRACTICAL CONSEQUENCES FOR EMPLOYERS OF RECOGNIZED MARITAL STATUS

The IRS ruling and its accompanying frequently asked questions explain some of the practical consequences of the IRS’s recognition of same-sex marriage, which include the following:

If an employer provided health coverage for an employee’s same-sex spouse, the employee may claim a refund of income taxes paid on the value of coverage that would have been excluded from income had the employee’s spouse been recognized as the employee’s legal spouse for tax purposes.

If an employer sponsored a cafeteria plan under which an employee elected to pay for health coverage for the employee on a pre-tax basis, and if the employee purchased coverage on an after-tax basis for the employee’s same-sex spouse under the employer’s health plan, the employee may claim a refund of income taxes paid on the premiums for the coverage of the employee’s spouse. Further IRS guidance is expected about whether an employee may make a mid-year election under a cafeteria plan consistent with the IRS’s recognition of same-sex marriage.

In the two situations described above, an employer may claim a refund of, or make an adjustment for, any excess Social Security and Medicare taxes paid. (A special administrative procedure for employers is forthcoming.) Claims for refunds of overwithheld income tax for prior years cannot be made by employers, but an employer may make adjustments for income tax withholding that was overwithheld in the current year (provided the employer has repaid and reimbursed the employee for the overwithheld income tax before the end of the calendar year).

A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans. For example, if a qualified defined contribution plan provides that a participant’s account must be paid to the participant’s spouse upon the participant’s death unless the spouse consents to a different beneficiary (and the plan does not provide for any annuity forms of distribution), then the plan must pay this death benefit to the same-sex surviving spouse of any deceased participant.

The IRS intends to issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with the IRS ruling. It is expected that future guidance will address, among other issues, plan amendment requirements (including the timing of any required amendments) and any necessary corrections relating to plan operations for periods before future guidance is issued.

The IRS ruling is complex and this Alert is intended only as a brief overview.