In June, the U.S. Supreme Court struck down Section 3 of the federal Defense of Marriage Act, which defines marriage as a union between one man and one woman, as unconstitutional under the Fifth Amendment. On Aug. 29, the Internal Revenue Service announced it will treat all legally married same-sex couples as married for all federal tax purposes regardless of the state where they reside. The same-sex couple must have wed in a state that recognizes such marriages.
Also this year, the Supreme Court struck down California’s Proposition 8, which outlawed same sex marriages on a technicality, and so avoided recognizing same-sex marriages as being the law of the land. The two decisions changed federal recognition but not a state’s decision to recognize same-sex marriages or not.
These decisions affect such things as federal estate tax and, more important for Idaho employers, legally married same-sex couples may elect for federal tax purposes to file married filing jointly and may have their federal taxes withheld at that rate. Since Idaho does not recognize same-sex marriages, the couples must continue to file as single on state returns and have withholding calculated at that rate for state tax purposes. This likely means employers will have to maintain two tax-accounting systems.
There may be a lot of dual accounting. Benefit programs including group health insurance plans and retirement plans are affected. Employers must:
Æ Determine whether any federal tax withholdings have been made in 2013 with respect to imputed income of employees who cover their same-sex spouses. If so, employers should cease such withholdings and reverse the withholdings for all of 2013.
Æ Convert any after-tax premium-payment withholdings from employees for their same-sex spouses’ medical coverage to pretax withholdings, provided such employees are already making pretax premium payments for 2013 pursuant to a cafeteria plan.
For all prior years for which the statute of limitations is still open (generally, the later of three years from the date the return was filed or two years from the date the tax was paid), employers may claim refunds for any FICA taxes paid by the employer with respect to imputed income reported for employees with same-sex spouse coverage.
With respect to retirement plans, effective in September, same-sex spouses must be treated as spouses for all purposes including, but not limited to, consent requirements for plan distributions, survivor benefits and qualified domestic relations orders.
The IRS is the first regulatory agency to make a policy change based on the DOMA ruling. It will be interesting to see how the other regulatory agencies change their policies relating to same-sex marriages. Bottom line: There will be a lot of court challenges.