IRS Releases Guidance on Same-Sex Spouses
On Aug. 29, 2013, the Internal Revenue Service (IRS) issued Revenue Ruling 2013-17
, which provides significant guidance on how the IRS will treat same-sex married couples under the federal Internal Revenue Code (Code). In short, and solely for purposes of federal
tax law purposes, the IRS will recognize a marriage between same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex, regardless
of whether or not those married individuals reside in a state that recognizes same-sex marriage. However, the IRS will not
consider individuals who have entered into a registered domestic partnership, civil union or similar arrangements as married for federal tax law purposes. The IRS' ruling has no effect on the tax codes of individual states, and individual states remain free to only recognize opposite-sex marriage for state
tax law purposes. While this guidance obviously impacts individuals in same-sex marriages, it also impacts employers that sponsor employee benefit plans – even employers located in states that do not recognize same-sex marriage.
The Windsor Case and the Unanswered Questions
In late June, in United States v. Windsor, the Supreme Court struck down section 3 of the Defense of Marriage Act (DOMA), which had provided that the terms "marriage" and "spouse" mean only an opposite-sex legal union for purposes of federal law. While it was clear post-Windsor that the federal government would need to recognize same-sex marriages for purposes of federal law, there were numerous unanswered questions. Should a federal agency construe a marriage as valid based on the state of domicile (where the couple resides) or the state of celebration (where the couple was married)? Does the term "marriage" mean marriage only or should domestic partnerships, civil unions or other formal legal relationships be treated as marriage? Should the federal government's recognition of same-sex marriages be applied retroactively? These unanswered questions were troubling for those in the employee benefit plans community who must administer plans with a clear understanding of both federal and state law. Marital status is central in the administration of benefit plans in many critical ways – including, for example, the timing of required minimum distributions, spousal consent requirements and the taxation of health care coverage. Revenue Ruling 2013-17 provides answers to many of these questions.
Interpretation of Marriage-Related Terms in the Code
The first issue the IRS addressed was the construction of the terms "spouse," "husband and wife," "husband," "wife" and "marriage" as those terms are used in the Code. Unsurprisingly, consistent with the Supreme Court's decision that the federal government cannot differentiate between same-sex and opposite-sex marriages, the IRS declared that these terms include an individual married to a person of the same sex. The IRS will read gender-specific terms such as husband and wife as interchangeable and gender-neutral.
Domicile Versus Celebration
Less clear was whether the IRS would construe a marriage as valid based on the state of domicile or the state of celebration. This interpretation has far reaching consequences for employers that sponsor employee benefit plans, as well as retirement systems that administer plans. Many employers and funds operate in more than one state and have employees who marry, work and retire in different states. If a same-sex couple's state of domicile controlled, treating current employees at the same employer differently based on state of residence and tracking employees' whereabouts after retirement could prove to be an administrative nightmare. In addition, employers who provide health benefits to same-sex married couples would have to provide different tax treatment for health benefits provided to an employee's same-sex spouse depending on whether the employee lived in a state that recognized same-sex marriage or not.
While the Supreme Court's decision did not provide clear guidance on this point, the IRS took a definitive stance: the IRS will construe a marriage as valid based on the state of celebration. In other words, the IRS will recognize a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriage. "State" for this purpose means any domestic or foreign jurisdiction having the legal authority to sanction marriages. This position is the less costly and administratively burdensome approach for both employers and the federal government. The IRS noted that this decision is consistent with the position that it has taken for the last 50 years in recognizing common-law marriages for federal income tax purposes, even when a couple in a common-law marriage moves to a state that does not recognize common-law marriage.
Domestic Partnerships and Similar Formal Relationships
The IRS did not extend marriage status to formal relationships that are not denominated as marriage under state law. Therefore, individuals in registered domestic partnerships, civil unions, or similar formal relationships recognized under state law will not be afforded the rights and features afforded same-sex and opposite-sex married couples under federal tax law.
Application: Prospective or Retrospective
The IRS declared that its ruling would be applied prospectively as of Sept. 16, 2013. However, taxpayers may amend their returns for a credit or refund for any overpayment of employment and income tax that might exist given the Windsor decision and Revenue Ruling 2013-17, as long as the applicable statute of limitations has not expired. The limitations period is typically three years and, thus, the years 2012, 2011 and 2010 remain open for all taxpayers. While taxpayers are not required to amend their returns, a same-sex married couple may want to do so if it would be more advantageous from a tax perspective, for example, to file jointly as married.
Employee Benefit Plans
The IRS provided that it intends to issue additional guidance on the retroactive application of the Windsor decision to employee benefit plans. At this time, subject to the applicable limitation periods, taxpayers may rely on Revenue Ruling 2013-17 in filing amended returns for credit or refund of an overpayment of employment and income tax with respect to employer-provided health coverage benefits or fringe benefits (such as dependent care and tuition remission) provided by the employer and excludable from income based on marital status. For example, if an employee made a pre-tax salary reduction election for health coverage under a cafeteria plan and elected coverage for a same-sex spouse (which would have been done on an after-tax basis pre-Windsor), the taxpayer may amend his or her return to treat the amounts paid as pre-tax salary reductions.
The IRS has provided sponsors and administrators of employee benefit plans with clear guidance on who is married for purposes of federal tax law – a couple legally married in any state is considered married, regardless of where they choose to reside. The IRS' choice of state of celebration significantly lessens the administrative burden and cost that employer plans and retirements funds would have incurred under a domicile rule.
Of course, state law complications remain. Some same-sex couples will live under two contradictory legal structures - for federal tax purposes, they will be married, but (in a majority of the states) they will not be considered married for state tax purposes.
Benefit plans face additional complications. It is unsurprising that the IRS is taking additional time to evaluate the consequences of retroactive application to employee benefit plans and their sponsors, administrators and participants. Plan amendments and corrections may be required. Beneficiary and other elections may need to be updated to protect the interests of same-sex spouses. While Revenue Ruling 2013-17 answers many questions post-Windsor, further IRS guidance will be very important in answering the remaining questions for the employee benefits community.
If you have any questions or would like additional information regarding the Windsor
decision and the IRS' new guidance and how they will impact your plans, please contact any member of Ice Miller's Employee Benefits Group
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.