News & Knowledge
IRS and DOL Issue Guidance on Same-Sex Marriage
Jonathan A. Kenter
Evelyn Small Traub
Jeanne E. Floyd
This is the second in a series of advisories on the Supreme Court’s ruling on same-sex marriages.
The U.S. regulators have started to issue guidance on same-sex marriages in view of the Supreme Court’s ruling invalidating portions of the Defense of Marriage Act.
The Department of Labor’s position:
The Family and Medical Leave Act (FMLA) allows employees to take leave for certain family and medical reasons, including time to care for a spouse who has a serious health condition or for activities related to a spouse’s military deployment. The Department of Labor (DOL) has updated its departmental guidance stating that for purposes of FMLA, the laws of the state in which an employee resides at the time of the leave determine whether a person in a same-sex marriage is considered to be a spouse. Thus, until new regulations are issued, employers are only required to make FMLA spousal-related leave available to employees that have a same-sex spouse if the employee resides in a state that recognize same-sex marriage. Conversely, employers are not required to make FMLA spousal-related leave available to an employee who, together with his or her same-sex spouse resides in a commonwealth or state, such as Virginia or Georgia, which does not recognize same-sex marriage. However, informal remarks by the Labor Secretary suggest that the DOL may revise its FMLA regulations to extend FMLA rights to all legally married same-sex spouses regardless of their state of residence in the near future.
The Internal Revenue Service’s position:
By contrast, the Internal Revenue Service (IRS) has recently ruled in Revenue Ruling 2013-17 that for all federal tax purposes, same-sex married couples will be recognized as legally married, regardless of where they live, so long as they were married in a jurisdiction (domestic or foreign) that recognizes same-sex marriages as legal. The IRS also provided FAQs with informal guidance reflecting this ruling. The ruling and FAQs do not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.
Impact on health insurance premiums:
As of September 16, 2013, employers will no longer be obligated to withhold payroll taxes on health benefits for legally married same-sex spouses. The IRS ruling does not permit a mid-year election change to those employees in same-sex marriages who did not elect spousal coverage because the coverage could not be paid for pre-tax prior to September 16, 2013.
If an employer previously provided health coverage for an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, the employee may claim a refund of excess federal income taxes paid by filing an amended Form 1040 reflecting the employee’s status as a married individual. Also, if an employer sponsored cafeteria plan allowed employees to pay premiums for health coverage on a pre-tax basis, a participating employee may file an amended federal income tax return to recover taxes paid on premiums that the employee paid on an after-tax basis for the health coverage of the employee’s same-sex spouse for all years for which the period of limitations is open. For both situations, the employer may claim a refund of, or make an adjustment for, any excess Social Security and Medicare taxes paid on the benefits if the statute of limitations is open. The IRS has stated that it intends in the near future to provide a special administrative procedure for employers to file claims in forthcoming guidance.
It is not yet clear how the tax laws of the various states that do not recognize same-sex marriage will react to the clarification of the federal rules. Some states automatically mirror federal rules for state income tax purposes, while others decide periodically whether to adopt specific changes to federal tax laws and still others apply their own rules without regard to federal rules. For employers, this means taxable wages reported for state purposes may not be identical to those reported for federal purposes. This potentially could lead to a discrepancy where certain benefits offered to same-sex spouses are still taxable at the state level despite not being taxed at the federal level. Until states begin to issue guidance in reaction to the IRS guidance, this state reporting will remain an open question.
Impact on welfare plans:
The IRS ruling will have a ripple effect on the administration of welfare plans. Insured plans will be required to comply with state law in determining whether coverage must be offered to same-sex spouses. Employers with self-funded plans may choose to offer coverage to same-sex spouses. In either case, if a plan offers same-sex spouse coverage, it must provide the same rights given to opposite-sex spouses for purposes of COBRA coverage and special enrollment rights. We believe that, because of the self-funded nature of such benefits, employers may choose to provide tax free benefits or reimbursements under flexible spending accounts, wellness programs, meals and lodging and tuition reimbursement and other fringe benefits to legally married same-sex spouses regardless of the state in which they live (as opposed to being required to provide such benefits).
Impact on qualified retirement plans:
As of September 16, 2013, qualified retirement plans will be required to recognize same-sex married couples as legally married regardless of where they live, so long as they were married in a jurisdiction that recognizes such marriages. This means that the joint and survivor and pre-retirement survivor annuity rules will apply to all legally married same-sex spouses, even if the employer operates only in states that do not recognize same-sex marriage. It also affects spousal consent procedures, direct rollovers, after-death required minimum distributions, hardship distributions, 415(b) limits for subsidized qualified joint and survivor annuities, early withdrawal penalties, and QDRO processing. The IRS has not yet provided guidance regarding the application of this rule to qualified retirement plans with respect to its retroactive effect for periods before September 16, 2013, but it has stated that it will do so in the near future.
It may take some time to update employer payroll systems to stop withholding employment and income taxes or imputing income for the health insurance of employees’ same-sex spouses. Those employers who can make the necessary changes to their payroll systems by September 16, 2013, should do so. Those who cannot should make the change as soon as possible after September 16, 2013. In either case, employers should communicate their strategy to employees in a timely way.
Employers will need to examine their plan documents to determine the impact of the IRS guidance on the eligibility of same-sex spouses for flexible spending accounts, dependent care assistance, health savings accounts, health reimbursement accounts, wellness programs, tuition reimbursement plans and other fringe benefits.
Practices and procedures concerning the administration of retirement plans insofar as they involve a spouse should be revised prospectively starting September 16, 2013. Formal and informal (summary plan description) plan documentation issues can be addressed later.
One of the difficult issues raised by the IRS guidance relates to retroactivity – that is, are plans going to be required to be amended for past years, and if so, how far back must the plans be amended to remain tax qualified? Although plan documents and summary plan descriptions will have to be revised to reflect the new definition of spouse, we would advise holding off on amending such documents until more guidance is issued by the IRS. The IRS has announced that additional guidance on matters, such as retroactivity, is a priority and will be issued shortly.
Finally, because of the contrasting positions of the IRS and DOL, at a minimum, employers should update their FMLA policies to reflect the DOL position. Alternatively, they could apply the more liberal position espoused by the IRS for purposes of their FMLA policy.
Please feel free to consult your Troutman Sanders employee benefits lawyer to help navigate these complex issues.
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