Same-sex Spouse

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The Ninth Circuit Judicial Council, an administrative body that reviews decisions of the court’s chief judge, recently weighed in on an issue involving same-sex domestic partner health benefits in the post-Windsor world.  The decision is interesting insofar as it relies at least partially on the Windsor decision in awarding “spousal” benefits to an unmarried…

Continuing its implementation of the United States Supreme Court decision in U.S. v. Windsor, the Internal Revenue Service (IRS) recently issued Notice 2013-61, which provides guidance for employers to make claims for refunds or adjustments of overpayments of Federal Insurance Contributions Act (FICA) and Federal income tax withholding (employment taxes) for 2013 and prior years with respect to certain fringe benefits and remuneration provided to same-sex spouses of employees.

In Revenue Ruling 2013-17 issued in August, the IRS announced that effective September 16, 2013, for Federal tax purposes, it would recognize same-sex marriages and was adopting a “place of celebration” rule pursuant to which all same-sex couples married in a state or foreign jurisdiction permitting such marriages would be recognized as spouses for federal tax purposes, regardless of their state of residence. It also announced that it intended to distribute streamlined procedures for employees who wish to claim refunds for federal income taxes paid on the value of health coverage to same-sex spouses and guidance for employers who wish to claim refunds for payroll taxes paid on such benefits.

Notice 2013-61 provides these special streamlined administrative procedures. Under these procedures, if an employer that withheld employment taxes for same-sex spouse benefits paid to or on behalf of an employee in the third quarter of 2013 ascertains the amount withheld on those benefits and repays or reimburses the employee for these amounts before filing the third quarter Form 941 (Employer’s Quarterly Federal Tax Return) due on October 31, 2013, an employer need not report these wages and withholding on the third quarter Form 941. If an employer does not repay or reimburse the employee for the overcollected amount before it files the third quarter 2013 Form 941, an employer must report the amount of the overcollection on that return and can use one of two special administrative procedures to make an adjustment or claim a refund.

If the U.S. Supreme Court rules that the federal Defense of Marriage Act (“DOMA”) is unconstitutional in Windsor v. U.S., which is expected to be decided this month, will employers that offer health benefits to employees’ same-sex domestic partners cease offering “domestic partner” benefits separately from benefits for employees and their spouses? Currently, one rationale for offering same-sex domestic partner health coverage is based on an equitable argument that, because an employee’s same-sex domestic partner typically cannot be treated as a spouse or dependent for federal tax purposes, a special coverage category is warranted. At the same time, this special status results in an economic hardship in that the employee must pay income tax on the value of coverage provided to the domestic partner. A repeal of DOMA would enable same-sex couples to avoid this economic hardship (at least with regard to federal income taxes). In other words, if DOMA is repealed, the definition of “spouse” for purposes of federal laws will no longer be limited to an opposite-sex spouse. Consequently, same-sex couples will have the opportunity to avoid federal taxation of their benefits by marrying. That could lead employers to conclude that the special category of domestic partner coverage is no longer needed.

The Defense of Marriage Act (DOMA) defines marriage at the federal level as a legal union between one man and one woman and excuses states from any obligation to recognize same-sex marriages recognized in any other state. As a result, many states have enacted so-called “mini-DOMA” laws providing that those states will not recognize for any purpose same-sex marriages recognized in other states.

As has been widely reported, DOMA’s constitutionality is currently under consideration by the U.S. Supreme Court in United States v. Windsor and a decision is expected in June. If DOMA is struck down, employers and other benefit plan sponsors should consider the potential effects not only on the definition of “spouse” for benefits purposes, but also the definition of “child.”