New Guidance on DOMA Decision
The Internal Revenue Service has recently issued guidance on how to apply the historic U.S. Supreme Court case, United States v. Windsor, 570 U.S.__, 133 S.Ct. 2657 (2013), for federal tax purposes. The historic Windsor decision, decided in late June 2013, involved an estate tax question filed by the surviving spouse in a same sex marriage legally entered into in the State of New York and held that Section 3 of the Defense of Marriage Act ("DOMA") is unconstitutional because it violates the principles of equal protection under the U.S. Constitution. However, the decision left many unanswered questions. The IRS has just released guidance in the form of Revenue Ruling 2013-17 which informs us how the IRS will interpret the Windsor decision for all federal tax purposes. The IRS has adopted a general rule that recognizes the marriage of same sex individuals that was validly entered into in a state whose laws allow for same sex marriage, even if the married couple is now living or domiciled in a state that does not recognize the validity of same sex marriages. This general rule will apply for all federal tax purposes, which includes payroll, income and estate taxes. This new ruling means that the Windsor decision affects employers in all 50 states for federal tax purposes.
It should be noted that this general rule does not apply to individuals who have entered into registered domestic partnerships, civil unions or other similar formal relationships. The term domestic partnerships covers individuals of the opposite sex or same sex. Domestic partnerships and civil unions are not legally married for federal tax purposes.
This new rule issued by the IRS became effective on September 16, 2013. At this time, employers need to take steps to ensure that they are in compliance with this new rule. Since this rule affects all federal taxes, this will affect employers’ open enrollment for group health and welfare benefit plans, payroll taxes and the administration of qualified retirement plans. For example, the definition of "spouse" in all plans covered by federal law would need to be amended to change the definition of "spouse" to include those individuals lawfully married in a state that recognizes same sex marriages. If the employer’s group health, dental or vision plan provides coverage to same sex spouses, premiums paid for those plans may now be paid on a pre-tax basis. Beginning on September 16, 2013, such withholdings from employee wages should be changed to be on a pre-tax basis rather than on a post-tax basis. This type of change would affect premiums under the group health, dental and vision plans as well as under a Section 125 cafeteria plan.
The IRS has stated that both employers and employees may be entitled to a refund on taxes paid prior to September 16, 2013. This means, for example, that for open tax years, employees may claim a refund for taxes due to income reporting on the value of employer-funded health coverage. Employees may claim a refund for premiums paid for health coverage on an after-tax basis for a same sex spouse for any open tax year. These claims for refunds are made by the employee filing an amended Form 1040 with the IRS.
Employers may also claim a refund on Social Security and Medicare taxes for overpayments of the employer and employee portions of Social Security and Medicare taxes. More information on this can be found in the instructions for Form 941-X. Note that employers may not claim a refund for over withheld income tax from prior years but employers may make adjustments for income tax withholdings for the current year provided the employer has repaid or reimbursed the employee for any over withheld income taxes before the end of the calendar year. Employers may also claim a refund on the employer portion of Social Security and Medicare taxes for former employees that cannot be located. The employer may not claim a refund on any employee portion for former employees. There is no requirement for employers to revise or amend any filed Form W-2s.
After September 16, 2013, employers must administer qualified retirement plans in compliance with the new rule. The IRS will issue additional guidance on the effect of the new rule for administration of plans prior to September 16, 2013. However, under the new rule, defined benefit pension plans, 401(k) plans, ESOPs, 403(b) plans, eligible 457(b) plans and similar qualified plans must recognize a same sex marriage that was validly entered into in a state whose laws authorize same sex marriage even if the married couple lives in a state that does not recognize the validity of same sex marriages. This means that each retirement plan must treat a same sex spouse, who is legally married under state law, the same as an opposite sex spouse for benefit purposes under the retirement plan. Note, the plan may not treat domestic partners, whether between opposite sex or same sex individuals, or persons in civil unions as legally married spouses.
In similar fashion, the US Department of Labor ("DOL") issued Technical Release 2013-04 which states that for Title I of ERISA and its regulations, the term "spouse" includes same sex individuals who are lawfully married under state law, no matter where the individuals are living or domiciled. The term "marriage" now includes a same sex marriage that is legally recognized under state law. The DOL guidance covers all ERISA plans, COBRA and HIPAA, but not FMLA. Additional guidance is expected from the DOL relating to how FMLA is impacted by the Windsor case.
These changes come very quickly and require immediate attention. We will be providing additional information to you to help maintain your plans in compliance with changing laws. If you have any questions, please do not hesitate to contact us.