IRS Provides Much Needed Clarification for Employee Benefit Plans After U.S. Supreme Court Case Strikes Down Defense of Marriage of Act (DOMA)
On August 29, 2013, IRS issued Revenue Ruling 2013-17 which clarified that for federal income tax purposes, the marital status of a same-sex couple is based on the state law or foreign law (e.g. Canada) where the marriage was performed even if the couple lives in a state where same-sex marriages are not recognized. This is sometimes referred to as the rule of celebration rather than the rule of domicile, which is the state law where the parties reside. For example, if a same-sex couple is validly married in New York, where same-sex marriages are legal, but the couple lives in Michigan, the marriage will be considered valid in Michigan for federal tax purposes even though Michigan does not recognize same-sex marriages. The IRS ruling is effective September 16, 2013.
How does this impact employee benefit plans and what steps must employers take to implement these changes?
The new rules affect employer-provided health and retirement plans. Retirement plans must provide that the same-sex spouse is the default beneficiary upon a participant’s death unless the spouse consents to an alternative beneficiary. Qualified domestic relations orders (QDROs) now apply to same-sex as well as opposite sex spouses. Qualified joint and survivor annuities and preretirement survivor annuities in defined benefit pension plans extend to same-sex spouses. Same-sex spouses are also covered by special spousal rollover rules and minimum distribution requirements at age 70 1/2.
An employer’s health care plan is even more significantly impacted by the IRS ruling. The value of employer-provided medical, dental, vision, prescription drug benefits and life insurance is no longer taxable to the employee who elects to cover his same-sex spouse under his employer’s health plan. Such employee can also pay for such coverage with pre-tax dollars under his employer’s Section 125 Cafeteria Plan. COBRA continuation rights must be extended to same-sex spouses. Employers will no longer owe FICA tax or be responsible for withholding FICA tax from employees for health care benefits provided to same-sex spouses.
What the IRS ruling does NOT do.
Neither the U.S. Supreme Court case striking down DOMA, nor the IRS ruling requires employers to offer health benefits to spouses. It is unclear whether an employer may elect to offer health benefits to opposite sex spouses but not to same-sex spouses. State nondiscrimination laws may prohibit disparate treatment between opposite sex and same-sex spouses or state laws may not apply to health benefits under an ERISA preemption theory. These issues have not yet been addressed. In addition, the IRS ruling affording favorable tax treatment to same-sex spouses does not apply to domestic partnerships or civil unions.
Next Steps for Employers and Employees.
Employers should review their health plan and retirement plan documents, in particular the plan definitions of “spouse”. Employers should determine plan design issues such as coverage and eligibility and notify employees regarding new tax treatment. In order to implement the new tax treatment, employers will need to ascertain which employees are married but do not need to request proof of marriage. The IRS will be issuing streamlined procedures for employers who wish to file refund claims for payroll taxes. The IRS also intends to issue guidance on how retirement plans and Section 125 cafeteria plans should treat same-sex spouses for periods prior to September 16, 2013, the effective date of the IRS ruling.