What is Defense of Marriage Act (DOMA)?

On June 26, 2013, the U.S. Supreme Court issued its decision on United States v. Windsor, which challenged the constitutionality of the federal Defense of Marriage Act (DOMA). Originally passed in 1996, DOMA defines a marriage as a union between a man and a woman. The Supreme Court found DOMA to be unlawful, giving legally married same-sex couple equal treatment under the law. This decision could have an impact on employers with regards to payroll taxes, health care insurance, FSA/Section 125 plans, and employment regulations/FMLA. The ruling allows same-sex married couples to receive the same health care, retirement savings, and Social Security tax and financial benefits and penalties as opposite-sex married couples.

In response, on September 23, 2013, the IRS used Notice 2013-61, and Rev. Ruling 2013-17, which offer guidance aimed at employers and their employees for adjustments and refund claims for overpayments on employment taxes due to same-sex spouse benefits.  As clarified in the ruling, for tax purposes the IRS recognizes same-sex marriages as those legitimate in a state or foreign jurisdiction that legally recognize their union, regardless of where the couple may live or work. It also indicates that for tax purposes, those in domestic partnerships or civil unions will not be recognized as married.

However, with the latest decision announced by the U.S. Supreme Court on June 26, 2015, in Obergefell vs. Hodges, the Court ruled that same-sex couples have a constitutional right to marriage under the Fourteenth Amendment's promise of equality, eliminating state level bans on same-sex marriages.
The latest decision by the Court now provides state-level consistency of state income tax treatment relating to employee benefits.

Tax Ramifications

If you now offer benefits for same-sex couples, you will need to figure out who is legally married in order to determine how to proceed with income taxes. While there's no obligation to go out and request employees' marital status from employees, it's an opportunity to modify procedures and new-hire processes. However, employers should immediately begin treating the value of health insurance benefits for legally married same-sex couples as non-taxable for the purpose of federal (and most recently state) income taxes. Employers and employees may also amend prior year returns (statutes limit the past three years only) to obtain a federal refund for taxes already paid because the same-sex marriage was not previously legally recognized.

Keep in mind; Federal law does not require employers to provide spousal benefits.

Employment Benefits

Tax free fringe, health, and reimbursement benefits are now also extended to same-sex couples and their children. Employers can now modify their cafeteria plans in order to allow enrollment for same-sex spouses and their children. This affects:

  • Healthcare Section 125 cafeteria plans
  • Health or dependent care flexible spending accounts (FSA)
  • Health Savings Accounts (HSA)
  • Health Reimbursement Accounts (HRA)
  • Family Medical  Leave Act (FMLA)

Next Step for Employers

Employers affected are to make adjustments to the withholding and benefit treatment for legally married same-sex couples. The IRS Notice 2013-61 provides two special administrative procedures for employers who need to correct overpayments for 2013.

Adjustments for 2013 on Fourth Quarter 2013

Option 1: Allows employers to use the fourth-quarter 2013 Form 941, Employer's Quarterly Federal Tax Return, to correct the overpayment of employment taxes during the first three quarters of 2013

Option 2: Allows employers to file one Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for the fourth quarter of 2013, to correct the overpayment of Federal Insurance Contribution Act taxes during all quarters of 2013

Employers are to write " Windsor" in dark, bold letters across the top margin of page 1 of Form 941-X.

Adjustments Prior to 2013

Employers can adjust for all four quarters of a calendar year on one Form 941-X, filed for the fourth quarter (limited to the past three years, i.e. 2010, 2011 and 2012). Normal amendment rules require employers to file a Form 941-X for each quarter being adjusted. Employers may still use this option.

Employers who are amending Form 941 returns must also provide corrected wages on Form W-2c.

As mentioned in the IRS notice, employers must first repay any overpaid amount to the employee and secure a written statement confirming that the employee has not claimed and will not claim a refund of the overpaid taxes.

Where can I read more?

The IRS published guidance for employers and individuals, however further guidance is expected as provisions surrounding the law are examined. A list of the current guidelines are listed below: