Yesterday Treasury and the IRS released much needed guidance regarding the U.S. Supreme Court’s decision on the Defense of Marriage Act. Specifically, Treasury and the IRS ruled that they will adopt a “place of celebration rule” under which legally married same-sex couples will be recognized for federal tax purposes regardless of the state in which they reside. Importantly, the ruling does not extend this treatment to domestic partnerships (whether registered or not), civil unions, or similar relationships. Treasury and the IRS will begin to apply this rule on September 16, 2013.
Treasury and the IRS intend to issue additional guidance pertaining to cafeteria plans, qualified retirement plans, and other employee benefit plans and arrangements, and to provide a streamlined process by which employers may obtain refunds on payroll taxes paid on imputed income. For now, however, we offer the following observations based on the new guidance:
- Employers should stop imputing the value of welfare benefits provided for the spouse of a same-sex married employee as income for federal tax purposes if the employee and his or her spouse were legally married in any state. This means that differences between state and federal tax treatment will continue in many states. Specifically, employers operating in states that do not recognize same-sex marriage may need to continue to impute income at the state level, but not at the federal level. Similarly, employers operating in states that treat civil unions as marriages for tax purposes may not need to impute income at the state level for benefits provided to the civil union partner of an employee, but would need to impute income at the federal level.
- Since the ruling expressly allows employees to file refund claims for benefits-related imputed income, employers may want to prepare to answer questions from employees about the amount that was included in their gross income in past years. (Refund claims will only be allowed for open years, which for most employees would include 2012, 2011, and 2010.)
- While the guidance may provide some flexibility with respect to the cessation of imputed income for federal income tax purposes, FAQs issued with the ruling make clear that qualified retirement plans must comply with the ruling as of September 16, 2013. As of that date, for example, a plan that provides for the payment of a spousal death benefit must pay that benefit to the same-sex surviving spouse of a deceased participant.
We will have more to say about these issues soon. Suffice it to say, this guidance will significantly impact the design and operation of employer-sponsored benefit plans and should be carefully reviewed by plan sponsors.