State of Celebration (Not State of Residence) Controls for Federal Tax Purposes

By Sarah Lockwood Church, Saul Ewing LLP--

Section 3 of DOMA limited the term “marriage” to a legal union between one man and one woman as husband and wife, and limited the word “spouse” to a person of the opposite sex who is a husband or wife.  As a result, certain provisions of the Internal Revenue Code (Code) referencing the marital status of taxpayers prohibited the IRS from recognizing same-sex marriages.

In United States v. Windsor,  133 S. Ct. 2675 (2013), 2013 U.S. LEXIS 4921, the Supreme Court determined that Section 3 of DOMA is unconstitutional, and the IRS, through Rev. Rul. 2013-17, has now revised its interpretation of Code sections referencing the marital status of taxpayers. This means that any term in the Code referring to marital status, such as “spouse” and “marriage” will include: “(1) an individual married to a person of the same sex if the couple is lawfully married under state law, and (2) such a marriage between individuals of the same sex.”  Terms such as “husband and wife,” “husband” and “wife” will be interpreted to include same-sex spouses. In addition, the IRS will interpret the Code to recognize “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.” 

However, this new interpretation of the terms “spouse,” “husband and wife,” “husband” and “wife” does not extend to same-sex or opposite-sex domestic partners, civil unions or any other formal relationship that is not a “marriage” under state law. Federal tax laws afford special tax treatment for certain employee benefits provided to employees, their spouses and their dependents.

Based upon the guidance to date, from and after September 16, 2013, benefit plan administrators will need to interpret those plans so that a same-sex spouse will be afforded the same benefit rights and tax treatment as an opposite-sex spouse. This will also require coordination with payroll providers, to reflect the ability for an employee to pay for health care benefits for his or her same-sex spouse (and dependents) on a pre-tax basis.  

The IRS indicated that further guidance on the potential retroactivity of the Windsor decision on tax-qualified retirement plans and other tax-favored retirement arrangements will be issued. This guidance will address the plan amendment requirements, including when amendments must be adopted, and “necessary corrections related to plan operations for periods before the future guidance is issued.” Clearly, benefit plans, administrative forms and Summary Plan Descriptions that incorporate Section 3 of DOMA to limit marital status terminology to opposite-sex couples, will need to be amended. Again, guidance on the required timing of plan amendments to tax-qualified plans and any potential retroactive application to retirement plans is still pending.

Tax Returns and Refunds

Tax returns for 2013 should be filed in accordance with this guidance. However, individual taxpayers who may have paid federal taxes for prior tax years have the option to file for refunds for periods still open under the applicable statutes of limitation. Generally, this period is three years from the filing date of the return or two years from the tax payment date, whichever is later. Specifically, the IRS guidance indicates that employees who made a pre-tax salary reduction election for health coverage under a cafeteria plan, but were required to pay for their same-sex spouse’s coverage on an after-tax basis, may now treat those after-tax contributions as pre-tax salary reductions.

Further, the guidance indicates that, to the extent the applicable limitation periods are still open, employees may file refund claims for any overpayment of employment (social security and Medicare) and income taxes with respect to employer-provided health coverage benefits or fringe benefits that were provided by the employer and excludable from income, based upon marital status, under specific Code Sections relating to employer-provided group health-care coverage or fringe benefits.

On the plan sponsor side, so long as the statute of limitation for filing a refund claim has not expired, an employer may claim a refund of any excess Social Security or Medicare taxes paid on benefits that should have been treated as pre-tax rather than after-tax. The decision to do this may depend upon the number of your employees who have entered into same-sex marriages.

Disclaimer: The views and opinions expressed in this article are those of the individual sources referenced and do not reflect the views, opinions or policies of the organizations the sources represent.