The Internal Revenue Service (“IRS”) issued guidance in the form of Revenue Ruling 2013-17 (“Ruling”) which helps plan sponsors determine how employees who are in a same-sex marriage are to be treated under their employee benefit plans. This stems from the Supreme Court’s ruling in the U. S. v. Windsor case earlier this year where Section 3 of the Defense of Marriage Act was ruled unconstitutional. The Ruling leaves many open questions as to how employer sponsored benefit plans should be administered but does provide guidance to plan sponsors with regard to their retirement plans.
The IRS will recognize the “state of celebration” which means that it will consider a same-sex couple married for federal tax purposes if they were married in a state or foreign country that recognizes same-sex marriages regardless of where the couple resides. This does not include couples who are in registered domestic partnerships, civil unions or similar relationships – it only includes married couples.
What does this mean to an employer that sponsors a qualified retirement plan for its employees? Qualified retirement plans must comply with the Ruling and must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans. This is the case even if the employer is in a jurisdiction that does NOT recognize the validity of same-sex marriages (or if the employee resides or works in a jurisdiction that does not recognize same-sex marriages). For example, if a retirement plan provides that benefits are paid to the participant’s spouse upon his/her death, unless the spouse consents to a different beneficiary, then the Plan must pay the benefits to the same-sex spouse of a deceased Plan participant. Plans must comply with these rules as of September 16, 2013. If the employer is a church or governmental entity, it may not have to comply with these requirements but a careful review of state statutes may be necessary to make this determination. Similar rules will likely apply to health and welfare benefit plans sponsored by employers.
In addition, the Ruling allows same-sex spouses to claim refunds for open tax years for income and employment taxes they paid on imputed income for health coverage. Employers may also obtain employment tax refunds based on coverage provided to employees’ same-sex spouses.
This Ruling will also have an effect on same-sex married couples who will now be required to combine their income for purposes of determining whether or not they are eligible for a subsidy to purchase health insurance through a Health Insurance Marketplace under the Affordable Care Act. This could prevent some from receiving subsidized health insurance that they may have received if they were an unmarried individual. The subsidies are based on household income, and in order to receive a subsidy, the household income must fall within certain parameters. Couples whose combined income exceeds 400% of the federal poverty level ($62,040 for a two person household for 2013) will be ineligible for a subsidy toward the cost of coverage even if that person, as a single individual, would have qualified for the subsidy.
Employers in all states (and not just in the states that recognize same-sex marriages) will now have to revise policies, procedures and benefit forms for their benefit plans as same-sex spouses seek benefits under their plans. At this point, all plan sponsors should inventory their employee benefit plans to determine the extent to which each is impacted by this Ruling. Some plans may require amendments and some may not. A careful evaluation of each plan document will help the plan sponsor determine the proper course of action. More guidance is expected from the Department of Treasury as well as the Department of Labor.
Stay tuned. There are still plenty of unanswered questions.