First Significant Tax Guidance Issued on Impact of Supreme Court Decision on Same-Sex Marriage

by Wilson Sonsini Goodrich & Rosati
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As we discussed in a previous WSGR Alert, the Supreme Court's ruling in U.S. v. Windsor concerning same-sex marriage will significantly affect many employee benefit plans. The IRS recently released the first significant guidance responding to the Supreme Court's Windsor decision and its impact on the treatment of same-sex spouses under federal tax rules.1 The guidance is effective on September 16, 2013, which means that in less than two weeks changes will need to be made in benefit plan operations.

The key takeaways from this initial guidance are:

  • Same-sex spouses are recognized for federal tax purposes, as long as they are lawfully married under the state or foreign law in the jurisdiction in which the marriage ceremony was held (even if the couple lives elsewhere). The guidance also makes it clear that registered domestic partnerships and civil unions are not recognized for federal tax purposes.
  • If a company was providing subsidized health coverage to same-sex spouses and imputing income on that subsidized coverage, affected employees can file for a refund for income and employment taxes on any open tax year (generally 2010 through the current tax year) with respect to (1) any income imputed to the employee for the value of coverage for the employee's same-sex spouse, and (2) generally, post-tax income used to pay premiums for his or her same-sex spouse.
  • Employers can file for a refund for FICA (Social Security and Medicare)/FUTA taxes for any open tax year with respect to employer and employee taxes paid related to (1) and/or (2) above. Even if the employee does not file a refund claim, employers can still file for a FICA/FUTA refund. We expect that the IRS will set up a streamlined filing approach for these refunds and issue more guidance soon.
  • For 2013, a new procedure will permit employers to seek a refund for over-withholding with respect to (1) and (2) above, but only if the affected employees are reimbursed for the excess withholding before the end of the year.
  • Retirement plans (including 401(k) plans) must treat same-sex spouses as spouses for all purposes, including hardship distributions, spousal annuities, and spousal consent for designating an alternate beneficiary for death benefits. This will be effective as of September 16, 2013. Future IRS/DOL guidance is expected to address whether any of these rules will have retroactive impact.

Action Items

For operational purposes, the new guidance is effective September 16, 2013. A strict reading of the guidance implies that all document changes also would need to be made by that date. However, based on our experience with changes in tax law, we expect that the IRS will provide a transition period for making document changes. On the assumption that the IRS will provide a transition period, we have not included document changes under our Immediate Actions heading.

Immediate Actions

  • Stop imputing income no later than September 16, 2013, if health, welfare, and fringe benefits currently are provided to same-sex spouses.
  • Ensure that distributions from retirement plans after September 16, 2013, comply with the beneficiary designation rules for employees who have same-sex spouses. At this point, it might be most efficient to notify retirement plan providers that all distributions after that date need to be approved by the company so that the company will have more time to address these rules.
  • Consider sending a participant communication to notify employees of the new rules and recommend that they check and update their records, if needed.
  • Consider surveying employees to determine which of them have same-sex spouses who were lawfully married under the state or foreign law in the jurisdiction in which the marriage ceremony was held. This disclosure should be made only on a voluntary and confidential basis by the employees. If a survey is undertaken, employment counsel should be consulted to determine appropriate processes so that this information is used only for permitted purposes and that employees understand that the information would not be used for employment purposes. Similarly, counsel should address the preservation of any applicable privacy rights.

Future Actions

  • Clarify in retirement plan documents that same-sex spouses are "spouses" for plan purposes. This is particularly important for beneficiary designations and spousal benefits.
  • Clarify in health and welfare plan documents that same-sex spouses will be treated as "spouses" under the plan for federal income tax purposes. Also consider whether this definition should be used for non-tax purposes.
  • Review and update plan distribution forms and administrative procedures to ensure that they reflect the new plan terms.
  • Consider reviewing other HR-related documents that refer to a "spouse" in order to modify the concept of spouse in those documents if it is important to the company to maintain a consistent definition across all benefits and plans. If a company currently is providing benefits to domestic partners, the company should be very careful about how definitions are changed to avoid causing unintentional problems.
  • Determine whether the company will apply for FICA and FUTA refunds for open years.

We are happy to review plan documents and operations to discuss changes that may be needed for compliance with the new guidance; however, as mentioned above, it is likely that the IRS will grant some transition period for document changes. As with all complicated rules implementations, we expect to see a lot of guidance in the near term, so there might be implementation wrinkles to some of these action items.

1 Revenue Ruling 2013-17, available at http://www.irs.gov/pub/irs-drop/rr-13-17.pdf, and accompanying frequently asked questions, available at http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Same-Sex-Married-Couples.

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.

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