On Aug. 29, the Internal Revenue Service and the U.S. Department of Treasury implemented a complex ruling recognizing the legitimacy of a legal same-sex marriage for federal tax purposes, including income, gift and estate taxes.
The new directive says legally married same-sex couples will be treated as married for federal tax purposes. Importantly, the ruling applies even if the couple lives in a jurisdiction that does not recognize same-sex marriage.
The decision applies to any same-gender marriage legally entered in the 50 states, the District of Columbia, a U.S. territory or a foreign country.
However, the edict does not pertain to a registered domestic partnership, civil union or comparable formal relationship acknowledged by state law. Accordingly, the terms spouse, husband and wife include an individual legally married to a person of the same sex. The ruling, effective Sept. 16, applies to all federal tax provisions with marriage as a factor, including filing status, employee benefits, individual retirement account contributions, taking the standard deduction, personal and dependency exemption claims and claiming the earned income tax credit or child tax credit.
Married same-gender couples generally must use a married filing status to file 2013 federal tax returns, as well as 2012 returns originally filed on or after Sept. 16. If desired, they may choose to file original, amended or adjusted returns for one or more prior tax years if those years are still open under the statute of limitations.
So what does that mean, if anything, for employers?
Group health and cafeteria plansMarriage to a same-sex spouse will now trigger the special midyear enrollment rights found in employer-sponsored group health plans. In addition, same-gender spouses will receive the same protections under the Consolidated Omnibus Budget Reconciliation Act – COBRA – as do traditional spouses.
An individual who made after-tax payments for coverage of a same-gender spouse under his company’s group health plan may now consider the after-tax payments, on an amended return, as being made on a pretax basis.
If the business sponsored a cafeteria plan and allowed a team member to pay premiums for health coverage on a pretax basis, the employee is able to file an amended return to recover income taxes paid on premiums funded on an after-tax basis for the health coverage of the same-gender spouse.
The corporation may claim a refund or make an adjustment for any excess social security taxes and Medicare taxes paid by the organization. This refund or adjustment is permitted even if the enterprise is unable to locate a prior worker who obtained the benefits, as long as the firm reasonably tries to find the employee. If the employee is notified but declines to participate in claiming a refund, the establishment is able claim a refund of the company portion of the taxes, but not the employee’s portion. A special administrative process regarding claim filing will be furnished from the IRS.
Retirement plans Tax-qualified retirement plans must be revised to offer spousal safeguards and benefits to same-sex spouses. For plans subject to qualified joint and survivor annuities and qualified preretirement survivor annuities, the plan must provide both, along with qualified optional survivor annuities to same-gender spouses. The permission of a participant’s same-sex spouse will be required for the participant to elect an optional form of benefit, designate a nonspouse beneficiary, or take a loan or hardship withdrawal from the plan.
Minimum required distributions will be decided according to applicable rules for married couples. A divorced same-gender spouse will be entitled to benefits under a qualified domestic relations order.
The rules that allow taxpayers to file amended returns for prior periods do not extend to qualified retirement plans. The IRS intends to provide guidance regarding plan amendment requirements and corrections to plan operations for periods prior to Sept. 16.
The IRS ruling will ripple through additional fringe benefit plans and programs such as qualified tuition reductions, employer-provided meals and lodging, dependent care assistance programs, business contributions to accident and health plans, and other benefits excludable from income.
Lynne Haggerman, M.S., is president/owner of Lynne Haggerman & Associates LLC, a Springfield firm specializing in management training, retained search, outplacement and human resource consulting. She can be reached at lynne@lynnehaggerman.com.
