The Internal Revenue Service recently issued guidance in the wake of the Supreme Court’s decision last June striking down the federal Defense of Marriage Act. As anticipated, the IRS took a state-of-marriage approach — anyone who is legally married in a state or country recognizing same-sex marriage is now treated exactly the same as an opposite-sex spouse for all qualified plan purposes and for tax purposes, including the taxation of medical, dental and vision benefits.
“That’s great news all around,” says Todd Solomon, a partner in the employee benefits practice of McDermott, Will & Emery, and author of Domestic Partner Benefits: An Employer’s Guide. “It’s great news for employees because they’re no longer taxed, and it’s good news for employers that they no longer have to impose the tax and track the imputed income for people who are married.”
The ruling “very reasonably states that the IRS must be able to administer, uniformly, its laws without undue burden on the [Internal Revenue] Service, or the taxpayer, and basically acknowledges that the rules it’s adopting now are ones that will avoid great administrative difficulty,” says Joanne Youn, a partner in the employee benefits group of Caplin & Drysdale. “It’s just the rule that makes the most sense in terms of the way that the IRS administers tax laws.”
Sixty-six percent of employers surveyed recently by the International Foundation of Employee Benefit Plans said they still needed further clarification and guidance on the Supreme Court’s decision on DOMA before making major changes to their employee benefits and policies.
But while employers may welcome the federal guidance, there may still be state tax issues that complicate the administration of same-sex benefits, cautions Solomon. “It’s not clear how the states will treat same sex spouse benefits, especially in states that don’t recognize same sex marriage,” he says. “Employers aren’t completely out of the woods on this taxation issue.”
Moreover, the recent guidance does not address retroactivity under pension plans. “It’s clear that under pension plans and 401(k)s, going forward, same-sex spouses have to be treated the same as opposite-sex spouses,” says Solomon. “But what’s not clear, is the retroactive implications. If a same sex spouse elected a life annuity, say six months ago, and didn’t get same-sex spouse consent, it’s not clear yet what that’s going to mean under federal law. The IRS punted on that issue and is going to issue [more] guidance.”
The rules apply only to marriage, not other types of relationships, such as civil unions or registered domestic partnerships.
If they haven’t already done so, Youn recommends employers create an inventory of all the benefits that are provided under the plan. “Review the associated plan document forms and specifications,” she says. “Consult with legal counsel regarding your questions about the impact of Windsor, and prepare yourself to respond to employee inquiries regarding the benefits for same-sex spouses.”
Same-sex spouses do have the right to go back and amend their Form 1040s for up to three tax years. Solomon says he expects employers to cooperate with employee requests for things like amended W-2s from prior years, “but it’s not addressed in the guidance what employers’ obligations are with respect to retroactivity on the tax side.”
More than half (55%) of organizations surveyed by the IFEBP are located both in states where same-sex marriage is legal as well as in states where it is not legal. About one-quarter of these companies (24.1%) say they will now extend benefit rights to all married same-sex couples even if they live in a state that does not recognize or allow same-sex marriage.
Register for this year’s Benefits Forum & Expo, being held Sept. 22-24 in New Orleans, to hear Todd Solomon speak to these post-DOMA benefits administration issues.
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