Defense of Marriage Act (DOMA)

UPDATE

On August 29, 2013, the Internal Revenue Service (IRS) issued Revenue Ruling 2013-17, which provides that same-sex couples who were legally married in a jurisdiction that recognizes such marriages will be treated as married for federal tax purposes - even if they live in a state that does not recognize same-sex marriage.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, for federal tax purposes, the term "marriage" does not include registered domestic partnerships, civil unions or similar formal relationships recognized under state law that are not actually denominated as a marriage. As of August 2013, the states of California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington, as well as the District of Columbia, recognize same-sex marriage.

The Revenue Ruling explains that affected individuals may (but are not required to) file amended returns for open tax years - generally 2010 through 2012.

Background

On June 26, 2013, the United States Supreme Court, in United States v. Windsor, struck down the definition of marriage under Section 3 of the Defense of Marriage Act of 1996 (DOMA) on the grounds that it violated the equal protection clause of the Fifth Amendment to the United States Constitution. DOMA previously barred federal recognition of same-sex married couples as "spouses." The impact of this decision is expected to be very broad, reportedly affecting over 1,300 federal statutes, including the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 (ERISA), the Family and Medical Leave Act (FMLA), the Consolidated Omnibus Budget Reconciliation Act (COBRA), and many other federal laws applicable to employers. For legally married, same-sex couples, the principal benefits-related consequences under federal law include tax-free treatment of healthcare coverage; pretax treatment under section 125 plans, COBRA coverage, and FMLA leave provisions. Consequently, prior to the Supreme Court decision in Windsor, employers were required to treat the value of employer-sponsored health coverage for an employee's same-sex spouse as imputed income for federal tax purposes for the employee.

Impact of Revenue Ruling 2013-17 for Employers

IRS recognition of same-sex marriages, based on the jurisdiction in which the marriage was performed rather than a state-of-domicile rule, is an important and helpful distinction for employers. The Revenue Ruling explained that, among other things,

A rule of recognition based on the state of a taxpayer's current domicile would also raise significant challenges for employers that operate in more than one state, or that have employees (or former employees) who live in more than one state, or move between states with different marriage recognition rules. For example . . . to administer employee benefit plans, employers (or plan administrators) would need to inquire whether each employee receiving plan benefits was married and, if so, whether the employee's spouse was the same sex or opposite sex from the employee. In addition, the employers or plan administrators would need to continually track the state of domicile of all same-sex married employees and former employees and their spouses. For all of these reasons, plan administration would grow increasingly complex and certain rules, such as those governing required distributions under section 401(a)(9), would become especially challenging.

The IRS issued FAQs along with the Revenue Ruling, which address the question of amended tax returns, but do not address employer obligations to provide Forms W-2C to affected individuals:

• FAQ #10 specifies that if an employer provided health coverage for an employee's same-sex spouse and included the value of that coverage in the employee's gross income, the employee may file an amended Form 1040, reflecting the employee's status as a married individual to recover federal income tax paid on the value of the health coverage of the employee's spouse.

• FAQ #11 provides that if an employer sponsored a cafeteria plan allowing employees to pay premiums for health coverage on a pretax basis, a participating employee may file an amended return to recover income taxes paid on premiums that the employee paid on an after-tax basis for the health coverage of the employee's same-sex spouse.

• FAQ #12 provides that, in the situations described in FAQs 10 and 11, the employer may claim a refund for U.S. Social Security and Medicare taxes paid on the benefits. The IRS notes, "A special administrative procedure for employers to file claims for refunds or make adjustments for excess Social Security and Medicare taxes paid on same-sex spouse benefits will be provided in forthcoming guidance to be issued by the IRS in the near future." However, the IRS reminds employers that claims for refunds of overwithheld income tax for prior years cannot be made by employers. Employers may make adjustments for income tax withholding that was overwithheld from an employee in the current year, provided the employer has repaid or reimbursed the employee for the overwithheld income tax before the end of the calendar year.

• Finally, the IRS notes in FAQ #14 that an employer may still claim a refund of the employer portion of the Social Security and Medicare taxes on the benefits if the employer cannot locate a former employee with a same-sex spouse who received the benefits described in FAQs 10 and 11. However, the employer must make reasonable attempts to locate an employee who received the benefits described in the FAQs.

Also, if an employee is notified and given the opportunity to participate in the claim for refund of Social Security and Medicare taxes but declines in writing, the employer can claim a refund of the employer portion of the taxes - but not the employee portion. "Employers can use the special administrative procedure that will be set forth in forthcoming guidance to file these claims," according to the IRS.

Future Guidance Will Address Employer Obligations and Provide Streamlined Procedures

The Revenue Ruling announced that the IRS intends to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously taxed health insurance and fringe benefits provided to same-sex spouses. Further guidance is also expected for cafeteria plans, and on how retirement plans and other tax-favored arrangements should treat same-sex spouses for prior periods.

Unfortunately, it is possible that employers may receive requests for Forms W-2C from affected employees before this future guidance is issued. Based on a reading of the Revenue Ruling, it seems possible that employers will be encouraged, if not required, to provide amended Forms W-2C to reflect the reduction in taxable wages in accordance with the DOMA decision and Revenue Ruling.

Effective Date

The IRS specifies that the Revenue Ruling "will be applied prospectively as of September 16, 2013." Additionally, the IRS notes that affected taxpayers may also rely on this revenue ruling "retroactively with respect to any employee benefit plan..." The ruling goes on to explain that it may be applied immediately for the purposes of pretax salary-reduction election for health coverage under a section 125 cafeteria plan sponsored by an employer.

The IRS guidance does not provide all the details concerning how to modify the tax treatment of benefits (including imputed income issues) provided by employers to the same-sex spouses of their employees. However, the IRS stated that they intend to issue further guidance clarifying the tax treatment issues for employment tax, cafeteria plans and retirement plans.