Supreme Court DOMA Decision—Part II: Wage Overstatements and Tax Refunds

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
Contact

In part one of this two-part series, “Supreme Court DOMA Decision—Part I: Fringe Benefits and Other Tax Implications,” I reviewed the fringe benefit and tax implications of the United States v. Windsor decision. In the second part of this series, I discuss the tax refunds that may be available to employers and employees  as a result of the Supreme Court’s ruling, in Windsor, that the federal Defense of Marriage Act (DOMA) is unconstitutional.

Refund Opportunity

The value of fringe and spousal health benefits that were included in wages because of DOMA represent a wage overstatement, presumably entitling both employers and employees to Federal Insurance Contributions Act (FICA) tax refunds and entitling employees to income tax refunds, at least with respect to employees residing in states where same-sex marriages are recognized. Current tax adjustment and refund procedures prohibit employers from refunding or adjusting employee income tax withholdings (but not FICA tax withholdings) for a tax year after the end of the calendar year. Accordingly, employers are precluded from providing employees refunds of income taxes that were withheld with respect to benefits provided before 2013.   

Pending guidance from the Internal Revenue Service (IRS), employers should consider making same-year income tax and FICA withholding adjustments with respect to benefits provided to same-sex spouses in 2013. Employers should also consider whether to file for a FICA tax refund or adjustments for benefits provided to same-sex spouses in 2010, 2011, and 2012, as well as whether to perfect any protective FICA tax refund claims that may have been filed for tax years before 2010. If a protective refund has not already been filed, a refund claim cannot be filed with respect to taxes paid on imputed income before 2010, as the statute of limitations on refunds has expired for those years. Although there is a standard procedure for requesting FICA tax refunds or adjustments, it is possible that the IRS will provide special refund procedures, as it did for employers in Notice 2013-8 after Congress passed the American Taxpayer Relief Act of 2012, which retroactively increased the mass transit monthly benefit cap for 2012.  Because any over-withholding of federal income or FICA taxes that has already occurred in 2013 should be correctable before year-end and the statute of limitations for FICA refunds/adjustments for 2010, 2011, and 2012 does not expire until 2014 (or later), employers may wish to wait for IRS guidance before they adjust affected employees’ withholdings. 

The current challenge for employers is identifying the population of affected employees to determine whether the potential amounts at stake support filing refund claims. As noted in part one of this series, employers may not have adequate information to know whether their employees with same-sex partners are legally married. Employers need to determine how they are going to identify same sex spouses of present and past employees. Employers should consider communicating the Supreme Court’s decision to employees and ask any employees in same-sex marriages to identify themselves. Once an employer has identified all employees who are in same-sex marriages, employers can start by considering taxes imputed after 2009 to employees or former employees (as a result of benefits provided to same-sex spouses) who live in states that recognize same-sex marriages. Depending on future guidance, the relevant population may include employees who were married in a state that recognizes same-sex marriages, without regard to whether their state of residence recognizes these marriages.

It is important to note that employers are not required to apply for a refund or adjustment of FICA taxes that they paid and the employee portion of FICA taxes that they withheld. (But note that an employer typically cannot apply for a refund of its portion of FICA taxes without first attempting to obtain employees’ consent to obtain FICA tax refunds on their behalf.) However, employers may be required to provide affected employees with a Form W-2c showing the amount of taxable wages for income and FICA tax purposes so that the employees can obtain an income tax and FICA refund on their own behalf. Employers that decide not to file a FICA tax refund claim should consider notifying all employees of their decision and providing them with a Form W-2c. 

Employees should also be entitled to income tax refunds with respect to taxes paid on imputed income under DOMA. Pending guidance, individual employees may amend their income tax returns to request a refund for the years 2010, 2011, and 2012, as the statute of limitations on refunds is still open for those years. Additionally, individuals who filed timely protective income tax refund claims for tax years before 2010 may be eligible for income tax refunds for earlier years. 

Conclusion

There are many significant and unanswered questions resulting from the Windsor decision that impact all employee benefits plans, not just the taxation of employer-provided fringe and health benefits. Hopefully these issues will be addressed soon by administrative guidance; however, the full scope and implications of the Windsor decision may not be known for some time. 

Note: this two-part blog series reflects the status of guidance with respect to the Windsor decision as of July 23, 2013. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ogletree, Deakins, Nash, Smoak & Stewart, P.C. | Attorney Advertising

Written by:

Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
Contact
more
less

Ogletree, Deakins, Nash, Smoak & Stewart, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.