Health Plan & Tax Guidance on DOMA Ruling: On August 29, 2013, the IRS provided its initial guidance (Rev. Rul. 2013-17 and accompanying FAQs for same-sex marriages and civil unions) regarding the effect of the Supreme Court’s decision in the Windsor case on tax law. In Windsor, the Court invalidated section 3 of the Defense of Marriage Act (DOMA) which had provided that the federal government could not recognize same-sex couples as married for any purpose.
The effective date of the ruling is September 16, 2013. However, several aspects of the guidance involve the availability of tax refunds related to the provision of previously taxable benefits provided by employers to same-sex couples.
Scope of the Guidance
While the initial guidance leaves a number of questions unanswered, it does address several “big-picture” issues.
First, it established that if a same-sex couple is validly married under the laws of a state that recognizes same-sex marriage, they will be regarded as married for all purposes under the tax code. This includes provisions of the code and regulations that use the terms “husband” and “wife” as well as “spouse” or “marriage”. This rule applies even if the couple resides in a state that does not recognize same-sex marriage.
The rule does not apply to same-sex couples who have entered into a state-sanctioned domestic partnership, civil union or other formal relationship that is not considered marriage under the laws of the sanctioning state.
Example 1: A same-sex couple marries in Vermont which recognizes their marriage. They move to Indiana which does not. They are nevertheless treated as married for purposes of federal tax law.
Example 2: A same-sex couple enters into a civil union in a New Jersey, a state that formally recognizes civil unions. They subsequently move to Iowa which recognized same-sex marriage. That are not considered married for purposes of federal tax law regardless of where they reside.
Effect on Employee Health Benefit Plans
The guidance does not require employee welfare benefit plans to provide health benefits to same-sex spouses. However, to the extent that an employer does so, the employer may treat the cost of coverage provided to the spouse as tax deductible. In addition, a health FSA may provide benefits to a same-sex spouse.
The marriage of a same-sex couple would be considered a status change permitting a mid-year election change. The guidance does not address whether the change in the legal environment is itself a status change for a previously married same-sex couple. It does not fall within the scope of the existing status change rules.
Note that a same-sex spouse may not be considered a “dependent” under federal tax rules.
Availability of Tax Refunds
Many employers will have included the value of health benefits provided to an employee’s same-sex spouse in the employee’s income. With federal recognition of same-sex marriage for tax purposes, these employers will have over-withheld income taxes for prior years and may have overpaid social security and Medicare taxes on the value of the benefits paid.
Employers cannot claim a refund for over-withheld income taxes in prior years (although employees can file amended returns.) Employers may make adjustments for income tax withholding that was overwithheld from an employee in 2013 provided the employer has repaid or reimbursed the employee for the overwithheld income tax before the end of the calendar year.
Employers can file refunds for excess Social Security and Medicare taxes paid to the extent the period for filing refunds is open. Employers may file for a refund of both the employer and employee portions of the over reported taxes on a previously filed Form 941 within 3 years of the date Form 941 was filed or 2 years from the date the employer paid the over reported tax reported on, whichever is later.
If the employer makes reasonable attempts to locate an employee who received the benefits that were treated as wages, but the employer is unable to locate the employee, the employer can claim a refund of the employer portion of Social Security and Medicare taxes, but not the employee portion. 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.