In July of 2013, we authored an article on the potential effects and issues that could arise following the United States Supreme Court’s decision in United States v. Windsor. At the time the original article was published, the collateral effects of the ruling were speculative; however, over the past months, various federal agencies have made decisions and offered guidance that has clarified (somewhat) how same-sex married couples will be treated under federal law.
In United States v. Windsor, the United States Supreme Court struck down section 3 of the federal Defense of Marriage Act (“DOMA”), which restricted the definition of “marriage” to a legal union between one man and one woman as husband and wife. The ruling opened the door for same-sex couples to qualify under federal statutes and regulations if the couple was legally married under state law. However, the practical effect of the Court’s ruling was unclear because the Court neither explained the domiciliary requirements same-sex married couples needed to qualify as married, nor commented on the scope of Windsor’s retroactive effect.
Tax Treatment in Light of Revenue Ruling 2013-17
On August 30, 2013 the Internal Revenue Service (“IRS”) issued Revenue Ruling 2013-17, which provided guidance on how same-sex couples would be treated for tax and employee benefit matters. The IRS has taken the position that, for federal tax purposes, same-sex couples validly married under state law are “married” under the Internal Revenue Code (“IRC”). Likewise, all marriage related terms, such as “spouse,” “husband,” and “wife” include individuals married to a person of the same sex.
Revenue Ruling 2013-17 made two other important pronouncements. First, the ruling announced that the IRS would follow the “place of celebration rule.” This means that same-sex couples who enter into a marriage in a state where same-sex marriage is lawful will receive the benefits of married status for federal tax and benefit purposes no matter where they live. Second, the ruling confirmed that the term “marriage” does not include registered domestic partnerships, civil unions, or other similar formal relationships that are not denominated as marriages under state laws.
The effects of this ruling on the taxation of same-sex married couples will be widespread. All provisions of the IRC that refer to marriages, spouses, husbands, and wives, will now apply to same-sex couples. Important examples include:
- Married same-sex couples must file all future federal tax returns as married (either married-filing-jointly, or married-filing-separately). Filing jointly may or may not be advantageous depending on the circumstances.
- Married same-sex couples will have the ability to use the unlimited estate-tax marital deduction, federal estate tax exemption, portability of a deceased spouse’s unused exemption amount, and the spousal gift provisions to reduce the amount of tax incurred on lifetime and estate transfers between spouses. (Note, an estate tax refund was the actual subject of the Windsor case).
- Employer provided health coverage for same sex-spouses will no longer be considered as additional income to the same-sex spouse employee. Further, employees may receive tax-free reimbursement under flexible spending accounts, health reimbursement arrangements, and health savings accounts for qualified medical expenses incurred by same-sex spouses.
The IRS also made it clear that Windsor will be applied on a retroactive basis. This means that same-sex married individuals will have the option to file amended returns and seek refunds for all prior years during they were married within the IRC’s statute of limitations (2010, 2011, and 2012). Married same-sex couples should consult with a tax professional to determine whether amending their prior returns to take advantage of the married filing jointly tax status would entitle them to a refund. Furthermore, employers and individuals alike have the right to file for employment tax (FICA) and income tax refunds for taxes assessed on income imputed to a same-sex employee spouse for employer provided spousal health benefits. IRS Notice 2013-61 provides simplified procedures for employers looking to take advantage of this process.
Employee Benefit Treatment in Light of Technical Release 2013-04
The Department of Labor (“DOL”) and the IRS both administer certain portions of the Employee Retirement Income Security Act (“ERISA”). Like the IRS’s interpretation explained above, the DOL has adopted the “place of celebration rule,” and all marriage related terms will apply to same-sex couples lawfully married under state law, no matter where they are currently domiciled.
ERISA qualified plans must now treat a same-sex spouse as a “spouse” for purposes of applying the federal tax and benefit rules. The following are some important highlights:
- Same-sex spouses are entitled to receive 100% of a participant’s death benefits unless the spouse consents to a different beneficiary.
- Same-sex spouses can now seek a qualified domestic relations order (“QDRO”) which apportions retirement benefits upon divorce.
- Same-sex spouses now have the right to COBRA continuation health coverage in the event of a participant’s termination, divorce, or legal separation.
Finally, the Department of Labor has also announced that same-sex spouses will be eligible for the protections provided to spouses under the Family and Medical Leave Act (“FMLA”). These protections entitle eligible employees of covered employers to take unpaid, job-protected leave for certain family and medical reasons with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave. Situations include child birth, and time taken to care for a child, parent or spouse with a serious health condition.
The Supreme Court stopped short of requiring the states to recognize the validity of same-sex marriages. This means that same-sex couples who reside in states that do not recognize their marriage will have to file as married for federal purposes and separately for state purposes. Stay tuned, as this issue may soon find its way to the Supreme Court.