Under new IRS and Department of Labor (DOL) guidance, legally married same-sex couples are entitled to all federal spousal tax and ERISA benefits, even if they live in states that don’t recognize same-sex marriage.
The guidance responds to the U.S. Supreme Court’s June decision in Windsor v. United States, which struck down Section 3 of the federal Defense of Marriage Act because it denied equal protection of the law to legally married same-sex couples.
Warning: This favorable treatment applies only to employees who are married. The guidance became effective Sept. 16. (Rev. Rul. 2013-17, IRB 2013-38; Technical Release No. 2013-04, 9-18-13)
Tax benefits. The IRS’ and the DOL’s broad interpretation makes payroll andmuch easier, since it allows for a uniform rule that doesn’t require you to delve into the details of a state’s marriage law. However, you may still need to inquire about employees’ marital status, since employees in civil unions and domestic partnerships aren’t covered under this guidance.
- Affected employees may refile their W-4s to claim married status. These employees are now entitled to the following benefits on a tax-free basis:
- Employer-provided health insurance, including pretax deductions into cafeteria plans. Wrinkle: Check your cafeteria plan document to determine whether employees may make midyear changes.
- Dependent care assistance. Wrinkle: Married couples are limited to deferring a combined maximum of $5,000 into dependent care flexible spending accounts. Tip: Remind these employees of the overall limit.
Tax-freeunder tax code section 132—no-additional-cost services, qualified employee discounts, spousal travel that is a working condition fringe, qualified retirement planning services and access to on-site gyms.
• THE IRC AND THEE: Most state tax laws are tied to the federal Internal Revenue Code (IRC) through IRC conformity provisions. Whether this new definition of spouse applies in states that don’t recognize same-sex marriage is a gray area. Upshot: For employees who don’t live in same-sex marriage states, you may still need to maintain separate payroll codes for nontaxable federal benefits and taxable state benefits. It would be prudent to check your state tax department’s website for withholding instructions in these instances.
Tax refunds. The IRS said that it will create a streamlined process for employers claiming FICA refunds. In the meantime, the IRS also said that you may apply for FICA refunds under the usual rules, provided the statute of limitations is open (generally for tax years beginning in 2010). What to do: refund overwithheld FICA taxes to employees and provide them with Form W-2c, file Form 941-X for each quarter a refund is sought and file Forms W-2c/W-3c with the Social Security Administration.
Employees must file Form 1040X to claim income tax refunds to recover the taxes paid on the value of health coverage for past open years. You may refund income taxes that were overwithheld this year, but you must do so by the end of the year.
Nontax benefits. Employees’ spouses are entitled COBRA benefits and special enrollment rights under HIPAA and the Affordable Care Act health care reform law.
Retirement benefits. Same-sex spouses are entitled to all spousal rights under qualified retirement plans, including 401(k) plans. What’s included: beneficiary designations, distributions made upon the death of an employee, hardship distributions and qualified domestic relations orders, or QDROs, which are issued upon the dissolution of a marriage.
. under the federal , however, isn’t an ERISA benefit. For FMLA purposes, the DOL issued Fact Sheet #28F, which reiterates its position that “spouse” means a husband or wife as defined under the law of the state where employees live.
State dominoes begin to fall. More than 30 states prohibit the recognition of same-sex marriage, including Pennsylvania and Ohio. However, those bans may be falling sooner, rather than later.
In Cozen O’Connor, P.C. v. Tobits, a federal trial court in Pennsylvania required spousal death benefits to be paid to a deceased employee’s same-sex spouse, because the couple was married in Canada. In Obergefell v. Kaisch, a federal trial court required Ohio to recognize a same-sex marriage that was performed in Maryland.
Vigilance pays: If you’re located in one of these states, it pays to keep to your ear to the ground regarding the status of same-sex marriage.
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