News Flash August 30 2013 Legal Same-Sex Marriages Recognized Under Federal Tax Law
News Flash: August 30, 2013 – Legal Same-Sex Marriages Recognized Under Federal Tax
A new IRS ruling resolves the question of which same-sex marriages are recognized for federal tax
purposes. For employers providing health coverage to same-sex spouses, this ruling means no
longer imputing income to employees for their same-sex spouses’ employer-provided health
coverage. There are three important caveats specified in the ruling:
• For a same-sex marriage to be recognized, it must have occurred in a state, territory or
foreign country that authorized same-sex marriages at the time.
• Couples that have entered into other similar relationships (e.g., domestic partnerships and
civil unions) will not be treated as spouses for federal tax purposes.
• This ruling applies only for federal tax law purposes. It does not apply to other federal laws
such as the FMLA.
The ruling is generally effective prospectively, starting September 16, 2013, and employers that
provide coverage to same-sex spouses will need to act promptly to adjust the tax treatment of that
coverage, as explained below.
NOTE: Employers should keep in mind that the various state and local taxing
authorities currently apply a variety of different rules for determining whether
benefits provided to a same-sex spouses are taxable, and they may or may not
follow this federal ruling on recognition of same-sex spouses. Given this situation,
the proper withholding rules to apply in many states and localities may remain
unclear until their taxing authorities issue guidance.
The IRS also issued a set of FAQs regarding same-sex spouses’ tax concerns and a separate set of
FAQs regarding tax issues for registered domestic partners and civil union partners.
This new IRS ruling, announced yesterday, implements federal tax aspects of the June 26 Supreme
Court decision invalidating a key provision of the 1996 Defense of Marriage Act (for details, see
Willis Human Capital Practice Alert, August 2013, “Supreme Court Rules on Same-Sex Marriage
and DOMA: Still Waiting for Guidance”). Under the invalidated provision, no same-sex marriages
were recognized for any federal law purposes, including tax purposes. This meant, among other
things, that an employer providing health coverage to an employee’s same-sex spouse was
required to treat the value of the spouse’s coverage as taxable compensation for the employee.
In the wake of the Supreme Court’s decision, it was unclear which same-sex marriages would be
recognized for federal tax purposes. It was possible, for example, that an otherwise valid same-sex
marriage would not be recognized unless the couple lived in a state that recognized their marriage.
NOTE: That is exactly the position that the DOL took in a recent announcement
regarding FMLA rights, stating that a spouse is “a husband or wife as defined or
recognized under state law for purposes of marriage in the state where the
employee resides.” A DOL fact sheet provides additional information. Currently,
Washington D.C. and 13 states recognize same-sex marriages (those states are
California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts,
Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington).
Because of the uncertainty following the Supreme Court decision, employers were advised to hold
off on changing their systems and procedures related to health and other welfare benefits until
federal agencies issued guidance on how they would implement the Supreme Court’s decision.
The IRS Ruling
Under the ruling, the IRS will treat two same-sex individuals as one another’s spouses if their
marriage was legal in the state, territory or foreign country where it occurred even if they live in a
state that does not recognize same-sex marriages. For example, a same-sex couple that marries in
Massachusetts (a state that authorizes same-sex marriages) will be treated as married for federal
tax purposes even if the couple resides in Missouri (a state that does not recognize same-sex
marriages). This “state of celebration” rule allows as much uniformity as possible for employers
administering plans in multiple states.
This ruling provides the general rule for tax treatment of benefits provided to same-sex spouses. It
will have far-reaching consequences for purposes of administering requirements such as COBRA,
HIPAA special enrollments and cafeteria plan elections, and the IRS states that it will issue
additional guidance on various matters affecting employee benefit plans. Even so, this ruling
enables employers to begin making changes to their systems and procedures related to health and
other welfare benefits.
The ruling states that it “will be applied prospectively as of September 16, 2013.” It appears that
employers have the choice to simply go forward in compliance with the ruling, without reissuing
W-2s or otherwise adjusting for past tax withholding. To comply with the ruling, an employer
providing benefits to same-sex domestic partners will need to determine, if it does not already
know, which of the same-sex couples are legally married. For those that are not legally married,
the employer would continue to impute income to the employee under federal rules unless the
domestic partner qualifies for tax-free coverage under federal rules. For those that are legally
married, the employer would stop imputing income to the employee no later than September 16,
NOTE: As explained above, state and local taxing authorities may not follow this
federal ruling regarding same-sex spouses, and the proper withholding rules to
apply may be unclear until those taxing authorities issue guidance.
The ruling also outlines some options for individuals and employers to obtain refunds of income
and payroll taxes paid in previous years. In the FAQs regarding same-sex spouses, the IRS notes
that, “in the near future,” it will issue a “special administrative procedure for employers to file
claims for refunds or make adjustments for excess social security taxes and Medicare taxes paid on
same-sex spouse benefits.”
Full implementation of this initial ruling on same-sex spouses will require detailed analysis of
many different requirements that apply to health and welfare benefits and, in many cases,
additional IRS guidance will be needed. NLRG is analyzing the ruling and its effects and will
provide additional information in a future publication.
The information in this publication is not intended as legal or tax advice and has been prepared
solely for informational purposes. You may wish to consult your attorney or tax adviser
regarding issues raised in this publication.