The Internal Revenue Service (“Service”) has recently issued guidance promised in the wake of the Supreme Court’s decision in United States v. Windsor. (See the IRS news release containing links to Revenue Ruling 2013-17 and frequently asked questions). Building on the precedent set in Revenue Ruling 58-66 that addressed the treatment of common law marriages (which are recognized in some states but not in others), the Service has ruled that, for purposes of federal tax law, an individual’s spouse will be determined by the law of the state in which the marriage was celebrated.
Effective September 16, 2013, same-sex couples who married in any domestic or foreign jurisdiction that recognizes the marriage of same sex couples will be subject to the same federal tax rules as other married couples. This includes filing status, claiming personal and dependency exemptions, personal deductions, contributing to an IRA and claiming the earned income tax credit or child tax credit. Further, for federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife,” do not include individuals (same or opposite sex) who have entered into registered domestic partnerships or civil unions that are not denominated as a marriage under the laws of that state, and the term “marriage” does not include such formal relationships.
In the context of tax-favored retirement plans, this means that:
- Survivor annuity rules (if applicable) and spousal consent rules will apply to same-sex spouses
- Surviving same-sex spouses may make tax-favored rollovers
- Surviving same-sex spouses may defer receipt of death benefits under Section 401(a)(9) of the Internal Revenue Code of 1986, as amended (“Code”)
- Employees may receive hardship distributions for the health care, education and burial expenses of a same-sex spouse
- A domestic relations order that names a same-sex spouse as an alternate payee can be a qualified domestic relations order
In the context of health and welfare plans, this means that:
- Employers should cease imputing income for the value of the employer-paid portion of coverage provided to same-sex spouses
- Same-sex spouses are entitled to COBRA benefits, if covered by the employer’s plan at the time of a loss of coverage
- Employees can pay for health and other welfare plan benefits for their same-sex spouse and step-children on a pre-tax basis
- Employees can be reimbursed from a flexible spending account for the expenses of their same-sex spouse and step-children
- If otherwise eligible for coverage, an employee’s same-sex spouse and step children will have HIPAA special enrollment rights (permitting mid-year elections to cover them for the remainder of the 2013 plan year)
Employees who have paid federal tax on imputed income for the value of the employer-paid portion of coverage for same-sex spouses may file for a refund of that tax for all “open” tax years (2010, 2011 and 2012).
As welcome as this guidance is, a number of open issues still remain. Can participants with same-sex spouses who are currently receiving an annuity form of benefit change that form to a qualified joint and survivor annuity? Will the Service and the Department of Labor permit retroactive claims for benefits from a surviving same-sex spouse? What amendments must be made to plan documents and when? How will the States respond to the Service’s adoption of the state of celebration rule?
We hope that many of these questions will be answered when the Service issues promised guidance on: cafeteria plans; streamlined procedures for employers to file refunds for taxes paid on imputed income; and possible retroactive effect of the state of celebration rule on qualified retirement plans and other tax-favored arrangements. In the meantime, employers should review their plans and administrative processes to determine how to respond to this change. While plan amendments may be put off for a while, administrative compliance begins September 16, 2013.