The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By Joseph S. Adams, Todd A. Solomon, and Brian J.
McDermott Will & Emery, Chicago, IL
The U.S. Department of the Treasury, the Internal Revenue
Service (IRS) and the Employee Benefits Security Administration
(EBSA) division of the U.S. Department of Labor (DOL) have issued
guidance clarifying certain employee benefit plan implications of
the Supreme Court of the United States' ruling in United States
v. Windsor, 133 S. Ct. 2884 (2013). In Windsor, the
Supreme Court ruled that §3 of the Defense of Marriage Act (DOMA)
is unconstitutional. Section 3 of DOMA had provided that, for
purposes of all federal laws, the word "marriage" means "only a
legal union between one man and one woman as husband and wife," and
the word "spouse" refers "only to a person of the opposite-sex who
is a husband or wife."
The recent Treasury and IRS guidance, issued as Rev. Rul.
2013-17, 2013-38 I.R.B. 201, and a set of Frequently Asked
Questions, provides that same-sex couples legally married in a
jurisdiction with laws authorizing same-sex marriage will be
treated as married for federal tax purposes, regardless of whether
the couple resides in a state where same-sex marriage is
recognized. This IRS approach recognizing same-sex marriages based
on the "state of celebration" took effect September 16, 2013. To be
clear, the IRS guidance does not apply to registered domestic
partners, civil unions or other similar relationships recognized
under state law but not denominated as marriage under that state's
The EBSA guidance, Technical Release 2013-04, similarly uses a
"state of celebration" rule and provides that, for purposes of the
DOL's regulations and other guidance interpreting ERISA, a spouse
will include all legally married same-sex spouses, even if the
couple resides in a state that does not recognize such marriages.
EBSA intends to issue future guidance addressing specific
provisions of ERISA and its regulations.
In other words, the Treasury, the IRS and EBSA have adopted a
"state of celebration" rule rather than a "state of residence" rule
for recognizing same-sex marriage with respect to employee benefit
plans. This consistent approach is helpful, because both the IRS
and EBSA have important oversight roles with respect to ERISA
Curiously, however, with respect to leave rights under the
Family Medical Leave Act (FMLA), the DOL-of which EBSA is a
part-adopted a state of residence rule. The DOL issued that FMLA
guidance prior to the Treasury/IRS and EBSA guidance adopting a
state of celebration rule. It is unclear whether the DOL will
revisit its prior FMLA guidance in light of Technical Release
2013-04. The DOL's FMLA state of residence approach also conflicts
with the state of celebration approach taken by the U.S. Office of
Personnel Management with respect to the ability of employees of
the federal government and the U.S. Department of Defense to enroll
their same-sex spouses in various government benefits, and two
courts' willingness to grant same-sex spousal rights even in states
not recognizing same-sex marriages. From an employer's
perspective, it obviously would be preferable to have a consistent
result from the various DOL branches.
Employers in all states-not just the 13 states and the District
of Columbia where same-sex marriage currently is legal-must prepare
for spousal benefit requests from same-sex couples. Same-sex
couples residing in states where same-sex marriage is not
recognized may travel to states where same-sex marriage has been
legalized to marry and obtain federal tax recognition of their
marriage. Such benefit requests may relate to any of the employer's
various benefit programs, particularly those benefits where spousal
benefits are required by federal law, e.g., spousal protection
under qualified retirement plans and special enrollment, and
Consolidated Omnibus Reconciliation Act of 1985 (COBRA) rights
under health and welfare plans. In addition, employers should
review their payroll procedures to ensure the proper federal and
state tax treatment of benefits extended to same-sex spouses.
Set forth below is a list of potential implications for a
variety of employee benefit programs.
Defined Contribution Plans
Defined Benefit Plans
All Retirement Plans
Medical, Dental and Vision Benefits
Federal Taxation of Health Benefits
An employee covering a same-sex spouse under the employer's
medical, dental or vision plans must be permitted to pay for the
spouse's coverage using pre-tax contributions under a cafeteria
plan and may take tax-free reimbursements from flexible spending
accounts (FSAs), health reimbursement accounts (HRAs) and health
savings accounts (HSAs) to pay for the same-sex spouse's qualifying
medical expenses. Employer-provided medical, dental or vision
benefits for a same-sex spouse will no longer be subject to federal
income taxation regardless of whether the employee and his or her
spouse reside in a state where same-sex marriage is recognized.
Employers that were providing benefits to same-sex spouses prior to
the Supreme Court's DOMA ruling must update their payroll
procedures to stop imputing the fair market value of such benefit
coverage as federally taxable income of the employee. This same
favorable federal tax treatment does not extend to
employer-provided benefits for an unmarried same-sex partner,
unless the same-sex partner qualifies as the employee's tax code
The recent IRS guidance allows employees to claim refunds for
open tax years for income and employment taxes paid on imputed
income for the value of employer-provided benefits for a same-sex
spouse. Employers that provided benefit coverage to same-sex
spouses may want to begin preparing for employee requests for a
corrected Form W-2 for each open tax year in which the employee
paid federal income taxes on benefit coverage for a same-sex
spouse. Similarly, employers may claim employment tax refunds based
on coverage provided to employees' same-sex spouses. Notice
2013-61, 2013-42 I.R.B. __, provides guidance for employers and
employees on how to make claims for refunds or adjustments of
income and employment taxes.
State Taxation of Health Benefits
Despite the change in the federal tax treatment of benefits for
same-sex spouses, such benefits may continue to be subject to state
income taxation depending upon the laws of the employee's state of
In states where same-sex marriage is recognized or where
same-sex domestic partnerships or civil unions have been legalized,
employees generally will not pay state income taxes on the fair
market value of coverage for a non-dependent same-sex spouse.
Employees in these states must be permitted to pay for the same-sex
spouse or partner's coverage using pre-tax dollars for state income
In states where same-sex marriage is not recognized, guidance is
needed to clarify the rules for taxation of benefits for a same-sex
spouse. The state income tax codes in the majority of these states
rely on an individual's adjusted gross income under federal tax
laws to calculate the amount of the individual's state income
taxes. Now that benefit coverage for legally married same-sex
spouses is no longer subject to federal income taxation, states
where same-sex marriage is not recognized will need to clarify
whether employees must continue to pay state income tax on the
value of benefit coverage for a same-sex spouse.
Employers may need to extend other spousal benefits to
employees' same-sex spouses. These benefits can include group rates
for insurance plans, such as supplemental life insurance, long-term
care insurance, home insurance and automobile insurance, as well as
other benefits such as bereavement leave, moving or relocation
expenses, tuition reimbursement, employee discounts and employee
assistance programs. As noted above, the DOL's current position on
FMLA creates some potential issues for leave programs as opposed to
ERISA programs (although some employers may choose to solve the
disconnect by voluntarily adopting a state of celebration approach
in both situations).
All employers should take action to ensure that their benefit
plans comply with federal laws with regard to benefits for same-sex
spouses. In addition to extending required benefits to same-sex
spouses, employers should review their payroll procedures with
respect to the taxation of such benefits and consider how to
communicate these changes to employees.
For more information in the Tax Management Portfolios,
see Finston and Jewett, 351 T.M., Plan Qualification - Pension
and Profit-Sharing Plans, Brisendine, Drigotas and Pevarnik,
385 T.M., Deferred Compensation Arrangements, and Cowart,
389 T.M., Medical Plans - COBRA, HIPAA, HRAs, HSAs and
Disability, and in Tax Practice Series, see ¶5430, Employment
Tax Provisions, and ¶5940, Cafeteria Plans.
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