What Employers Need to Know About Recent Same-Sex Marriage Interpretations

Sep 23, 2013

Any blog post that deals with both Internal Revenue Service and Department Of Labor rulings is bound to be, well, as one of my faithful readers would say, “On the dry side.” But, not only does this post give North Carolina employers a lot of recent and important information, it uses the gem of a term “state of celebration”—what a great concept to appear in an IRS ruling, of all things! I’ll come back to that thought by the end of the post…

A few months ago, I opined on how this year’s Supreme Court rulings may affect employers. (See “But What Does That Mean for My Business: What Employers Need to Know Following Last Week’s Supreme Court Decisions” at https://www.mwblawyers.com/employmentblog/?p=128). When the landmark United States v. Windsor opinion was issued, because North Carolina law does not provide for the marriage of same-sex couples, it appeared that North Carolina employers would not be affected. However, over the last few weeks the IRS and the DOL have issued regulatory guidance that makes clear that some, but not all, federal laws will apply to same-sex couples that have been married in a state that recognizes same-sex marriage, regardless of whether they reside in a state that recognizes same-sex marriage. This “state of celebration” rule means that if members of a same-sex couple are married in New York, a state that recognizes same-sex marriage, but live in North Carolina, they will be considered married for the purposes of certain federal laws because the state in which they celebrated their marriage recognizes same-sex marriage. Based on the current state of the law, here is what North Carolina employers need to know:

In Revenue Ruling 2013-17, the IRS ruled that it will now interpret the terms “marriage,” “husband and wife,” “husband” and “wife” to include same-sex spouses who have been married in states that recognize same-sex marriage, regardless of their state of domicile. Note that domestic partnerships, civil unions, and other non-marital relationships will not be considered marriages under the Code and the application of current federal tax laws to those relationships remains unchanged. Practically speaking, this means that effective immediately, same-sex couples who are married may file joint federal tax returns.

Under this Ruling, both employers and employees may also be entitled to certain tax refunds. 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 was taxed on that income and the employer likely paid Social Security and Medicare taxes on it. The employer may now claim a refund of, or make an adjustment for, any excess Social Security taxes and Medicare taxes paid. A special administrative procedure for employers to file claims for refunds or make adjustments for excess Social Security taxes and Medicare taxes paid on same-sex spouse benefits is supposed to be provided in future guidance from the IRS. The Ruling also allows employees to file amended Form 1040s 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 same-sex spouse or on premiums the employee paid on an after-tax basis for his/her same-sex spouse that now may be paid on a pre-tax basis.

Qualified retirement plans are also required to comply with Revenue Ruling 2013-17. This means that a qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal laws relating to qualified retirement plans. Qualified retirement plans must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the couple lives in a jurisdiction that does not recognize the validity of same-sex marriages. The IRS intends to issue further guidance on how qualified retirement plans and other-tax favored retirement arrangements must comply.

The Ruling also has some interesting tax benefits for same-sex married couples involved in joint ventures or who are employed by one another. For more information about Revenue Ruling 2013-17, visit www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-For-Same-Sex-Married-Couples/

For North Carolina employers, however, Revenue Ruling 2013-17 offers a practical quagmire. Because North Carolina does not recognize same-sex marriage, the tax analysis will vary for federal and state purposes. Absent changes to the state revenue rules, the best guidance I have found for NC employers thus far is to set up deductions for same-sex spousal coverage so that the coverage is exempt from federal income and FICA taxes, but not exempt from state income tax. These split deductions will allow the coverage to be withheld pre-tax for federal purposes and after-tax for state purposes. Employers faced with this dilemma should talk with their payroll personnel, accountant, and legal counsel to determine the best way to handle the current differences in state and federal tax law.

The Department of Labor has also issued directives in the aftermath of Windsor. First, the Department ruled that unlike in Revenue Ruling 2013-17, for purposes of the Family Medical Leave Act, the definition of “spouse” is determined by the employee’s state of domicile, not state of celebration. This means that whether one member of a same-sex married couple may qualify for FMLA leave to care for the other, hinges on whether the state in which the couple is living recognizes same-sex marriage. As North Carolina does not recognize same-sex marriage, North Carolina employers would not provide true FMLA leave for care of same-sex spouses. (They may continue voluntarily to offer more generous leave provisions to allow for unpaid leave for same-sex spouse care; however, such leave will not qualify as FMLA leave.)

Second, however, the DOL issued a separate directive from its Employee Benefits Security Administration (“EBSA”) regarding the meaning of “spouse” and “marriage” as those terms appear in the provisions of ERISA and the Internal Revenue Code that EBSA is tasked with interpreting. EBSA agreed with Revenue Ruling 2013-17 and adopted the “state of celebration” rule for the validity of same-sex marriages. The terms “spouse” and “marriage” appear in numerous provisions of Title I of ERISA and its regulations. Among the provisions specifically referencing spouses or marriages are ones relating to COBRA continuation coverage, enrollment in group health plans as a dependent, and qualified domestic relations orders. EBSA has announced its intention to issue future guidance addressing specific provisions of ERISA and its corresponding regulations.

The rules regarding same-sex marriages are likely only to get more complicated before they are simplified. Employers in North Carolina can no longer assume that because North Carolina does not recognize same-sex marriages, they are immune from required change. Employers with questions regarding the treatment of affected employees’ pay and benefits should consult counsel for guidance in this rapidly changing area of the law.

And now let’s all take a deep breath and spend a moment in our own “state of celebration.” What a wonderful world it would be, if we could all be domiciled in our own little “state[s] of celebration.” Don’t you think?

 

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