The Internal Revenue Code ("Code") excludes from an employee’s income the value of certain employer-provided benefits that cover or are provided to the spouse of the employee. Section 3 of the Federal Defense of Marriage Act ("DOMA"), however, prohibited the IRS from recognizing same-sex spouses under the Code. Thus, until recently, the value of benefits provided by an employer to the same-sex spouse of an employee generally had to be treated (for federal income tax purposes) as additional wages paid to the employee.
On June 26, 2013, the United States Supreme Court, in United States v. Windsor, ruled that Section 3 of DOMA was unconstitutional. (For a more detailed discussion of the Windsor decision, see our July 2013 Employee Benefits Law Action Memo.) Since Windsor, several pieces of IRS guidance have addressed how the IRS will implement the decision. In Revenue Ruling 2013-17, the IRS held that individuals of the same sex who are lawfully married under the laws of any State will be treated as spouses for federal income tax purposes, even if the same-sex couple currently resides in a State that does not recognize same-sex marriages. Employees who are lawfully married to a person of the same sex will no longer be required to recognize income (for federal income tax purposes) equal to the value of certain benefits provided to the employee’s same-sex spouse. In addition, because the Windsor decision has retroactive effect, the IRS also indicated that employees who previously paid federal income taxes on the value of benefits provided to their same sex spouses can seek refunds of those taxes by filing amended individual tax returns for open tax years (generally 2010, 2011 and 2012, as applicable).
In Notice 2013-61, the IRS provided special administrative procedures that an employer may follow to correct the employer’s overpayments of FICA taxes and federal income tax withholding on same-sex spouse benefits. Generally, employers file an IRS Form 941 to report FICA tax paid and income tax withheld for each calendar quarter. A Form 941-X is used to correct overreported taxes for each calendar quarter. In Notice 2013-61, the IRS pointed out that employers may still use the regular Form 941-X procedure for overpayments relating to same-sex spouse benefits. However, to reduce administrative burden, the IRS provided alternative procedures for employers to use for taxes attributable to same-sex spouse benefits (including taxes on premiums paid for health plan coverage, remitted tuition benefits, dependent care benefits and other fringe benefits).
For 2013 overpayments, the IRS provided the following two alternative procedures for employers:
If an employer repays or reimburses (against subsequent wages) employees for over-collected FICA taxes and income tax withholding for same-sex spouse benefits for the first three quarters of 2013 by December 31, 2013, then the employer may make a corresponding reduction to the FICA wages and income taxes withheld for the first three quarters of 2013 on its fourth quarter 2013 Form 941.
If an employer does not repay or reimburse employees for over-collected FICA taxes and income tax withholding for same-sex spouse benefits by December 31, 2013, then the employer may file one Form 941-X for the fourth quarter of 2013 to correct FICA taxes for all quarters of 2013. However, under this option, an employer cannot make adjustments for over-withholding income taxes in 2013. Moreover, to use this option, an employer must satisfy the regular Form 941-X filing requirements, including repaying or reimbursing employees for over-collected FICA taxes (or securing employee consents to file claims on their behalf), and obtaining statements from employees providing that they will not also claim a refund of over collected FICA taxes. Finally, the employer must write "WINDSOR" in dark, bold letters at the top of the Form 941-X.
The IRS also provided an optional procedure for overpayment of FICA taxes in years before 2013. The procedure is similar to alternative number 2 above. That is, an employer may file one Form 941-X for the fourth quarter of each prior open tax year to correct FICA taxes for all four quarters of that year. (No adjustment can be made for over-withheld income taxes.) Further, in addition to satisfying the regular Form 941-X filing requirements, including repaying or reimbursing employees, obtaining required statements (and consents, if applicable) from employees and writing "WINDSOR" at the top of the form, the employer must also file Forms W-2c, which reflect employees’ corrected wage and tax amounts. Employers may file a Form 941-X and Forms W-2c for prior tax years still open under the statute of limitations, which are generally tax years beginning in 2010, 2011, and 2012.
The deadline for filing a Form 941-X is the later of three years from the date the original Form 941 was considered filed (Forms 941 are considered filed on April 15th of the succeeding calendar year if filed before that date), or two years from the date the taxes reported on the Form 941 were paid. For 2013 Forms 941, this means that the deadline is April 15, 2017, or, if later, two years from the date the taxes reported on the Forms 941 were paid.
Employees and employers that have paid income and employment taxes attributable to benefits provided to an employee’s same-sex spouse may now seek refunds or adjustments for those taxes. Refunds and adjustments should generally be available for tax years beginning in or after 2010. Employees seeking refunds of income taxes will have to file amended individual tax returns for prior open years. Employers seeking adjustments/credits may take advantage of the special procedures described above and should be cognizant of the year-end deadline described in the special procedure applicable to 2013.