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.
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.