To Have and To Hold | Employment Tax Considerations in Same-Sex Partner Benefits

This summer, the Supreme Court ruled in United States v. Windsor, that Section 3 of the Defence Defense of Marriage of Act (DOMA) (P.L. 104-199) is unconstitutional, meaning that lawfully married same-sex spouses may be treated as married for federal tax purposes. The ruling has broad implications and raised myriad questions about how federal tax laws should be applied to same-sex spouses retroactively and going forward.

Just before Labor Day Weekend, the Treasury and the Internal Revenue Service (IRS) issued much-anticipated guidance addressing how the federal definition of marriage is  amended as it pertains to same-sex partners. At the same time, the IRS posted Frequently Asked Questions to its website.

Revenue Ruling 2013-17 is located here:

FAQS are found here:]

and here:]

State and Country of Celebration is Federal Standard

In a nutshell, for federal tax puproses, a couple is considered married if their marriage is valid under the laws of a state or foreign country.  Sensitive to the administrative hardship of applying a jurisdiction of residence rule, the IRS will look instead to the jurisdiction where the marriage was granted (i.e., the jursidiction of celebration.)

Treasury /IRS clarify that it will not deem as married a same-sex couple given only civil union or domestic partnership standing in the jurisdiction, even if such jursidcition grants these individuals the rights and responsiblities of married persons for purposes of that jurisdiction’s income tax.

So, Who’s Married Now?

It seems on the surface that it should be clear which couples now meet the federal marriage definition.  For instance, as of September 1, 2013, same-sex marriages were  recognized under the laws of 13 states and the District of Columbia.

End of story?  Not necessarily.

Individuals may assert, and correctly so, that they hold marriage licenses outside of these 14 U.S. jurisdictions.   For instance, certain counties have been issuing marriage licenses in states  (e.g., New Mexico and Pennsylvania) whose laws do not specifcally recognize same-sex marriages.

Additionally, same-sex marriage laws are rapidly evolving.  The courts are weighing in on the validity of same-sex marriage bans in some states (e.g., New Jersey, Ohio, Virginia), and some legislators have expressed support to legalize it in others (e.g., Hawaii).   Like the U.S., 2013 saw an increase in the number of countries recognizing same-sex marriages (e.g., France, Uruguay).

Without question, state and international same-sex marriage practices are quickly changing, in some instances resulting in temporary confusion as to the validity of a jurisdiction’s marriage license.

It is uncertain if Treasury or the IRS will issue updates as to those jurisdictions where marriage licenses have valid standing for federal purposes.

Same Sex Partner Benefits Post Windsor 8-28-2013

Retirement plans must adopt new standards by September 16, 2013

Tax-qualified retirement plans are required to recognize the validity of a same-sex marriage (as Revenue Ruling 2013-17 defines the term) prospectively as of September 16, 2013.   Plans are given more time to make plan amendments, and the IRS expects to issue further guidance on this topic.

Payroll must respond quickly, but not so fast

IRS FAQs tell affected taxpayers that they may immediately file for income tax refunds for prior years, which the IRS has clarified is only tax years 2010, 2011 and 2012, unless the statute of limitations is open (e.g., a protective refund as filed).  At the same time, the IRS announced that it will, sometime in the future,  issue streamlined procedures that employers may follow for employee and employer Social Security/Medicare (FICA) refunds for prior years.

There are a few important steps that payroll departments can take while awaiting the official word from IRS.

  1. Identify prior Forms W-2 that are implicated by the retroactive effect of same-sex spousal benefits
  2. Quantify adjustments that will need to be made to wages previously reported in boxes 1, 3 and 5.  Part of this analysis should also include 2013 wage and tax overstatements pursuant to same-sex partner benefits and how federal income tax and FICA withholding adjustments will be made.

For retroactive refund purposes, what fringe benefits are affected?

 The IRS has stated that only the fringe benefits shown in the chart below are implicated in prior-year refund requests; however, future guidance will include information as to other benefits that also may be involved. 

IRC Section   Fringe Benefit
106 Health and accident benefits including employee pre-tax contributions under a Section 125 plan, health savings accounts, health reimbursement arrangements and long-term care
117(d) Qualified scholarships
119 Meals and lodging for employer’s convenience
129 Dependent care assistance
132 No-additional cost services and qualified employee discounts