IRS will recognize all legal same-sex marriages for federal tax purposes

The Treasury Department and the IRS have announced that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes, including for retirement plans. Thus, same-sex couples who are legally married in jurisdictions that recognize their marriages will be treated as married for federal tax purposes regardless of whether or not the jurisdiction of their residence recognizes same-sex marriage. To implement the federal tax aspects of the U.S. Supreme Court’s decision in United States v. Windsor, Executor of the Estate of Spyer on June 26, 2013, the IRS has issued guidance, including a revenue ruling and two sets of frequently asked questions (FAQs).

In Windsor, the Court struck down Section 3 of the Defense of Marriage Act (DOMA), which had provided that the definition of marriage applied only to the legal union of one man and one woman and that the definition of spouse referred only to a person of the opposite sex who was a husband or wife. The Court did not address Section 2 of DOMA, which provides that no state or territory is required to recognize a same-sex marriage that is recognized by another jurisdiction.

In Rev. Rul. 2013-17, the IRS states that, although states have different rules of marriage recognition, uniform nationwide rules are essential for efficient and fair tax administration. The IRS also noted that a rule of recognition based on the state of a taxpayer’s current domicile would raise significant financial and administrative challenges for employers operating in more than one state, as well as for the administrators of employee benefit plans. For example, the need for and the validity of spousal elections, consents, and notices would change each time an employee, former employee, or spouse moved to a state with different marriage recognition rules. For federal tax purposes, however, “marriage” does not include registered domestic partnerships, civil unions, or other similar formal relationships that are recognized under state law, but are not marriages under the state’s law.

IRS FAQs address benefits issues

The IRS has provided questions and answers for individuals of the same sex who are legally married and for individuals in registered domestic partnerships and civil unions. The FAQs address a number of tax return and employee benefit issues, including retirement plans.

Qualified retirement plans. The FAQs indicate that qualified retirement plans are required to comply with the following rules pursuant to Rev. Rul. 2013-17:

1. A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.

2. For purposes of satisfying the federal tax laws relating to qualified retirement plans, a qualified retirement plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.

3. A person who is in a registered domestic partnership or civil union is not considered to be a spouse for purposes of applying the federal tax law requirements relating to qualified retirement plans, regardless of whether that person’s partner is of the opposite or same sex.

Health coverage. The FAQs explain that if an employer 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 can file an amended Form 1040 reflecting the employee’s status as a married individual to recover federal income tax paid on the value of the health coverage of the employee’s spouse. Generally, claims for refunds can be filed for three years from the date the return was filed or two years from the date the tax was paid, whichever is later.

Cafeteria plans. The FAQs also indicate that if an employer sponsored a cafeteria plan under which an employee elected to pay for health coverage for the employee on a pre-tax basis, and if the employee purchased coverage on an after-tax basis for the employee’s same-sex spouse under the employer’s health plan, the employee may claim a refund of income taxes paid on the premiums for the coverage of the employee’s spouse.

Prospective application of rules

Rev. Rul. 2013-17 will apply prospectively as of September 16, 2013. Thus, qualified retirement plans must comply with these rules as of September 16, 2013. Although Rev. Rul. 2013-17 allows taxpayers to file amended returns that relate to prior periods in reliance on the rules in Rev. Rul. 2013-17 with respect to many tax return and employee benefits matters, this rule does not extend to issues relating to qualified retirement plans. The IRS has not yet provided guidance regarding the application of Windsor and these rules to qualified retirement plans for periods before September 16, 2013.

The IRS intends to issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17. It is expected that future guidance will address the following, among other issues: (1) plan amendment requirements (including the timing of any required amendments), and (2) any necessary corrections relating to plan operations for periods before future guidance is issued.

Source: IRS Rev. Rul. 2013-17; Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law; and IRS News Release 2013-72.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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