In June, the Supreme Court invalidated a portion of the Defense of Marriage Act and provided favorable tax treatment for the estate of a same-sex spouse. Like most litigation, the Court’s decision raised as many questions as it answered. The IRS has now answered for taxpayers and employers some of the questions raised by the decision. In Revenue Ruling 2013-17, the Service has taken a common-sense approach to determining who is married and has simplified the administration of employee benefit plans for employers.
The ruling includes the following new rules:
For purposes of determining whether a same-sex couple is married, the law of the state in which their marriage occurred, and not their state of residence, will control. If the couple was married in State A, which permits same-sex marriages, and now lives in State B, which does not permit same-sex marriages or recognize such marriages performed in other states, they will be treated as married for federal tax purposes. Thus, they would be permitted to file joint federal income tax returns, and the employer of one of the couple would treat the other member of the couple as the employee’s spouse for purposes of administering the employer’s employee benefit plans.
This will be of particular benefit to an employer that operates in multiple states or has employees living in multiple states. It will not have to consider the laws of its employees’ states of residence to determine whether those states recognize the same-sex marriages; all it must determine is whether an employee was married to begin with.
Same-sex partners who are in a domestic partnership, civil union or similar relationship recognized by state law will not be treated as married for purposes of federal tax laws.
The new rules will generally apply on and after September 16, 2013. Same-sex couples who file federal income tax returns after September 15, 2013 may not elect to treat themselves as single for purposes of the returns. An employer that maintains a qualified retirement plan would, on and after the effective date, have to allow a same-sex spouse the same rights regarding benefits, consents and elections that are accorded to opposite-sex spouses under the retirement plan. Generally, taxpayers and employers will not have to worry about marital status prior to September 16, 2013 or actions taken before that date that were dependent upon marital status.
A same-sex couple that is treated as married under the new rules may, but is not required to, amend the separate federal income tax returns that they filed before the effective date in order to treat themselves as married. This would enable them to potentially reduce the taxes already paid and thereby obtain refunds. Amended returns may be filed only for periods for which the right to claim a refund has not run.
If an employer pays premiums on a health insurance policy that provides coverage to an employee or the employee’s spouse, the premiums will not be included in the employee’s gross income for tax purposes. Before the Supreme Court decision, premiums paid by an employer with respect to an employee’s same-sex spouse would have been treated as a part of the employee’s gross income. Under the new rules, those premiums would not be a part of the employee’s gross income, and the employee may, but is not required to, file amended returns (to the extent the period for claiming a refund has not run) to secure refunds based upon his reduced gross income. The employee may likewise seek a refund if he or she was paying for his or her own coverage on a pre-tax basis through a cafeteria plan but paying for his or her spouse’s coverage on an after-tax basis. The after-tax payments would be treated as pre-tax payments through the cafeteria plan for this purpose.
If a same-sex employee elects to retroactively treat health insurance premiums paid by his or her employer as not being a part of his or her gross income, the employer may, but is not required to, file an amended return to secure a refund of Social Security and Medicare taxes that would not have been payable if the employee had been treated as married at the time the employment taxes were payable. Such an amended return can be filed only if the period for claiming a refund has not yet run. An employer cannot seek a refund of income taxes withheld under these circumstances.
The ruling states that additional guidance will be forthcoming with respect to the effect of the Supreme Court decision on employee benefit plans.
Note that other federal agencies, including the Department of Labor, have suggested that they will look to the laws of an employee’s state of residence for purposes other than taxes and employee benefits. For example, the Department of Labor has stated that the law of the state of residence will apply in determining who will be a spouse under the Family and Medical Leave Act.
The ruling simplifies the determination of marital status for both individual taxpayers and employers, and the new rules will typically result in lower taxes and easier administration. The ruling also provides liberal opportunities to request refunds but does not mandate that taxpayers incur the cost of filing amended returns.
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Alton L. Knighton Jr.
Tax Practice Group
Neil V. Birkhoff
Chair, Tax Practice Group