The United States Department of the Treasury and the Internal Revenue Service (the “Agencies”) yesterday announced that same-sex couples who were legally married in jurisdictions that recognize same-sex marriages (i.e., either in states within the United States, United States territories or in other countries) will be treated as married for federal tax purposes. Recognition will be granted without regard to whether the couple lives in a jurisdiction that recognizes same-sex marriage. This new position was announced in Rev. Rul. 2013-17, as augmented by a series of Frequently Asked Questions dealing with same-sex spouse issues and related domestic partner and civil union issues.
This much needed (and much anticipated) guidance is in response to the recent United States Supreme Court decision in United States v. Windsor. In that case, the Court struck down Section 3 of the Defense of Marriage Act (popularly referred to as “DOMA”), which for federal law purposes had defined a spouse only as a person of the opposite sex. The Court’s decision in Windsor seems to have raised more questions than it answered, and chief among those new questions was the proper treatment of same-sex couples under federal tax law. Rev. Rul. 2013-17 goes a long way towards resolving those questions even though uncertainties remain. The ruling, which likely will not escape controversy (particularly in states that do not support same sex-marriages), should bring welcomed certainty and ease of administration, including with respect to the federal tax laws that apply to retirement and health care plans. The new ruling does not extend to registered domestic partnerships, civil unions or similar relationships that may be recognized under some state laws, and so persons involved in these relationship will not be granted status as spouses in recognized marriages under federal tax laws.
As noted above, same sex couples will be treated as married for federal tax purposes no matter where they reside. This treatment enhances the ability of plan administrators to pursue a uniform administration of employee benefit plans — a worthy goal going back to the origins of ERISA. However, while the impact of Rev. Rul. 2013-17 on retirement and health care plans will be significant and generally positive, the ruling in fact applies with respect to all federal tax provisions where marriage is a factor (including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit). For federal tax purposes, spouses in valid same-sex marriages on a going forward basis will be granted all of the same rights, and will be subject to all of the same burdens and obligations, as spouses in other recognized marriages.
Under the new guidance, persons who are in same-sex marriages may (but are not required to) file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the applicable statute of limitations (i.e., generally three years from the date the return was filed or two years from the date the tax was paid, whichever is later). In addition, employees are permitted to claim refunds for federal income tax paid on the value of health coverage for same sex spouses and on premiums paid for coverage for same-sex spouses (which until now had to be paid on an after-tax basis). It is unclear how employees will be able to calculate these amounts or whether employers will be obligated to assist in that process.
The new guidance further provides that employers may (but again are not required to) seek refunds for payroll taxes paid on such health care benefits on behalf of same sex spouses. It is expected that an administrative procedure for the recovery of those payroll taxes will be announced in the near term.
The Agencies will begin applying the terms of Rev. Rul. 2013-17 on September 16, 2013, although it seems possible that this effective time could be challenged. Subject to statute to limitation considerations, taxpayers may elect to apply these provisions for earlier periods as well. The Agencies indicated that they will issue further guidance on how tax-favored employee benefit programs should treat same-sex spouses for periods before September 16, 2013. In this regard, the Agencies promised that this additional guidance would take into account the interests of all interested parties, including the plan, the plan sponsor and affected employees, and further stated that the guidance would allow for sufficient time to make any necessary amendments and/or corrections. Any effort to apply these rules retroactively could have negative consequences for employee benefit plans. Stay tuned for that additional guidance!