|September 23, 2013|
The IRS and Treasury Department will recognize all legal same-sex marriages for Federal tax purposes regardless of where the couple resides. Thus, a same-sex couple who is legally married in a state that permits same-sex marriages (1) will be treated as married for Federal income tax purposes, including employee benefit plan rules, even if they reside in a state that does not permit the issuance of licenses for same-sex marriages. Civil unions or registered domestic partnerships will not be recognized.
Impact on Health Benefits
Previously, an employee who elected to cover a same-sex spouse under his employer’s health plan (where such coverage was permitted) had to recognize imputed income or the value of the employer-provided coverage and was not permitted to pay his share of the premiums with pre-tax dollars. Now, the exclusion for health coverage will be available to legally married same-sex couples. An employee may file an amended From 1040 to recover the Federal income taxes paid on employer-provided health coverage and on premiums paid on an after-tax basis for coverage of a same-sex spouse. Such requests for refunds are limited to open years under the statute of limitations (generally 2010, 2011 and 2012).
Employers may also seek a refund of Social Security and Medicare taxes paid on same-sex spousal benefits for open years.
Impact on Retirement Plans
As of September 16, 2013, qualified retirement plans must treat a same-sex spouse in the same manner as an opposite-sex spouse. As a result:
- (a) lump-sum death benefits under a defined contribution plan must be paid to a same-sex spouse unless such spouse consents to the designation of a different beneficiary;
- (b) annuity benefits under a defined benefit plan must be paid in the form of a 50% (or higher) joint and survivor annuity unless the same-sex spouse consents to a different form of payment;
- (c) a same-sex spouse may rollover a distribution, either directly or indirectly, to his own IRA or employer-sponsored plan; and
- (d) a participant with a same-sex spouse will be considered married for purposes of the minimum distribution rules which may result in smaller mandated distributions.
Different Federal Agencies Take Different Positions
Although the IRS and the Treasury Department will base an individual’s marital status on whether the individual was lawfully married in the state where the ceremony occurred, other Federal agencies will look to the rules of the state of residence. Specifically, (a) the Department of Labor has stated that for purposes of the Family and Medical Leave Act, a spouse is determined under the laws in the state where the employee resides (see Fact Sheet 28F) and (b) the Social Security Administration has stated that the laws of the state of residence at the time an individual applies for Social Security benefits should be determinative. Thus, an individual may be considered married for some Federal laws but not others.
Next Steps for Employers
Qualified retirement plans must comply with the new rules by September 16, 2013. The IRS will issue further guidance on the application of the new rules for periods before September 16 and will issue rules on required plan amendments (including the timing of any required amendments). At a minimum, virtually all qualified retirement plans will need to be amended to redefine “spouse.”
Pending the issuance of further guidance, employers should administer qualified retirement plans by treating lawfully married same-sex spouses as entitled to the same benefits as opposite-sex spouses. If they have been providing health coverage to same-sex spouses, employers should consider seeking a refund of any excess Social Security and Medicare taxes paid.
(1) Currently licenses for same-sex marriages may be issued in California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington and the District of Columbia.