On June 26, the US Supreme Court required the federal government to recognize marriages between two individuals of the same sex if the marriage is recognized by the state in which the couple lives. On August 29, in applying the Supreme Court’s decision, the Internal Revenue Service ruled that the determination of whether a couple is married for federal tax purposes will be based on whether the marriage was legal where it was performed. By adopting the so-called “state of celebration” rule (rather than the so-called “state of domicile” rule), the IRS has made the federal tax benefits of marriage available to all same-sex couples in the United States who have chosen to marry, even if they live in states that do not currently recognize marriage equality. The ruling makes clear that marriages validly performed in any domestic or foreign jurisdiction will be recognized for federal tax purposes, but same-sex and opposite-sex couples who have only entered into civil unions, domestic partnerships or other relationships treated as equivalent to marriage will not be recognized as married for federal tax purposes.
While the IRS ruling may arguably be more broad than required by the Supreme Court’s holding, the IRS found it was necessary to provide for uniform nationwide rules which are essential to efficient and fair tax administration.
The IRS ruling has a broad impact on same-sex couples who have married. It also has a potentially broad impact on employers and their benefit plans. While questions about benefit plan administration remain, some things are clear based on the IRS ruling:
- An employee who currently elects health plan coverage for a same-sex spouse and the spouse’s children should no longer need to pay taxes on the value of such coverage.
- An employer who provides health plan coverage to same-sex spouses and their children should no longer need to impute income to the employees for the value of such coverage.
- For any tax year that remains open (likely tax years 2010, 2011 and 2012, and perhaps 2009), taxpayers can file refunds for overpaid employment and income taxes based on the value of same-sex spousal coverage (although an employee’s amended tax return cannot limit the amendment to the overpayment related to the health plan coverage—the entire return will need to be recomputed on a “married filing separately” or “married filing jointly” basis).
While not addressed in the IRS ruling, it is arguable based on both the Supreme Court’s holding and the IRS ruling that any sponsor of a self-insured group health plan may risk discrimination-based lawsuits if such plan does not either eliminate all spousal coverage or extend spousal coverage to include same-sex spouses. This may be the case regardless of whether the plan is maintained by an employer in a state that recognizes marriages between individuals of the same sex.
From a retirement plan perspective, the ruling seems to require that spousal rights under retirement plans (e.g., survivor annuities and default beneficiary designation) will apply to all married same-sex couples.
The ruling states that it is effective on a prospective basis on and after September 16, 2013 (although it may be relied on earlier for certain purposes). It also provides that additional guidance will be issued to address specific questions about benefit plan administration and the retroactive application of the Supreme Court’s holding, although the ruling included no indication about the timing of future guidance or the topics that are expected to be covered.
The ruling is available here.