New Guidance on Tax Treatment for Same-Sex Spouses
By Lisa S. Robinson & Debra J. Linder
The Internal Revenue Service recently issued guidance in how the Federal Tax Code will tax employee benefits with respect to married same-sex couples. Same-sex couples who are legally married in a state or foreign jurisdiction will be treated as spouses under the Code, even if the couple currently resides in a state that does not recognize same-sex marriage.
The IRS guidance is based on a newly issued Revenue Ruling 2013-17 and in the form of FAQs here and here on the IRS website. This guidance is in response to the U.S. Supreme Court’s decision in Windsor (133 S. Ct. 2675 (2013)) ruling Section 3 of the Defense of Marriage Act (DOMA) unconstitutional.
Impact on Employers
Effective Date. In general, the benefit plans must comply with these rules prospectively as of September 16, 2013; however, with respect to married same-sex couples who previously received welfare benefits the guidance addresses retroactive tax filings and refund applications. Furthermore, the IRS intends to issue guidance regarding retroactivity, plan amendment requirements and possible correction procedures.
Only Marriage. The IRS guidance specifically addresses the issue of registered domestic partnerships, civil unions and other similar formal relationships recognized under state law and indicated that the guidance does not apply to those relationships. Only same-sex couples who marry in a jurisdiction that lawfully recognizes same-sex marriages will be treated as married for federal tax purposes.
Qualified Retirement Plans. For purposes of complying with the tax laws related to qualified plans, employers who sponsor qualified retirement plans should review plan terms and administrative practices to ensure that legally married same-sex spouses are treated the same as opposite sex spouses. For example, spousal consent of a legally married participant (regardless of gender) is required for a participant to name a different beneficiary.
Welfare Plans. Unless the plan terms expressly define a spouse as a person of the opposite-sex, legally married same-sex spouses should be treated as a spouse for all plan purposes such as eligibility, COBRA and special enrollment rights. Furthermore, just as coverage for an opposite-sex spouse is provided on a pretax basis, the guidance clarifies that coverage provided to a same-sex spouse is on a pretax basis and there should be no imputed income for such coverage. Note employees who enroll their eligible domestic partners (individuals who are not legally married) in group health plan coverage should continue to receive imputed income.
Please contact a member of Fredrikson & Byron’s Compensation Planning & Employee Benefits Group should you have any questions on the application of this guidance to your plans or policies.