Same-Sex Benefits

That reach, however, is vitally important for employers and employees, especially considering that “marriage” pervades federal statutes and regulations (upwards of 1,000 federal benefits and burdens are keyed to marital status). The impact of the Windsor decision on same-sex married couples in areas including social security, housing, and employment has yet to unfold, and federal agencies have just begun the massive undertaking of determining how the Windsor decision impacts their own rules and regulations.

What Employers Should Know

A fundamental question Windsor left open is whether a couple validly married in a state that recognizes same-sex marriage but residing in another state will be considered married for federal purposes. This question has been answered, at least for federal tax purposes, by a highly anticipated IRS Revenue Ruling. In Revenue Ruling 2013-17 (issued Aug. 29, 2013) the Service ruled broadly in favor of recognizing same-sex marriages.

The Revenue Ruling explicitly provides that all marriages ' regardless of the sex or gender of the individuals who are married ' are accorded all of the same federal tax benefits. Most significantly, the Ruling specifies that a marriage is defined by the jurisdiction where it is celebrated, not the couple's state of residence. This is referred to as the “state of celebration” rule, in contrast to a “state of residence” rule. Therefore, the IRS will recognize the marriages of couples even in states that do not recognize same-sex marriage so long as the marriage was legally contracted in another state or foreign jurisdiction. (We note that the IRS's guidance in Rev. Ruling 2013-17 is in tension with federal regulations applicable to the Family Medical Leave Act (FMLA).

In 29 C.F.R. ' 825.122, “spouse” is defined as “a husband or wife as defined or recognized under State law for purposes of marriage in the State where the employee resides, including common law marriage in States where it is recognized.” (Emphasis added). In a post-Windsor Fact Sheet, the Department of Labor (DOL) reiterated this definition without discussing its continuing vitality in light of Windsor. However, the DOL's Technical Release No. 2013-04, dated Sept. 18, 2013, expressly adopts the state of celebration rule for employee benefit plans, leading to predictions that the DOL may reverse course on the FMLA definition in time.

Federal Taxes

In addition to embracing the state of celebration rule, Rev. Ruling 2013-17 also provides that same-sex couples will be treated as married for all federal tax purposes, including income, gift, and estate taxes. Married same-sex couples now enjoy the benefits, and in some cases burdens, of marriage for all federal tax purposes. As one important example, same-sex couples are now entitled to file their returns jointly, or they may elect to use the married filing separately status. Same-sex couples are no longer permitted to file singly and in most cases they no longer have the option of filing using “head of household” status.

Some couples will find that their new joint filing status will result in a larger tax burden because of the marriage penalty, while other couples will see their tax liability reduced; all couples in recognizing states will find their tax compliance burden lightened. For many couples, however, the intangible value in being able to check “married” on the federal form might well be the most meaningful consequence of the Ruling.

Health Insurance

The benefit of providing such benefits tax-free is best illustrated by looking at health insurance, which is one area that has caused considerable trouble to employers and employees alike. Same-sex couples now have the ability to insure their spouses through employer-provided health insurance without being made to include the value of that insurance in their income. The Revenue Ruling addresses in summary fashion employer-provided health coverage benefits as well as fringe benefits provided under sections 106 (accident and health plans); 117(d) (qualified tuition reduction); 119 (meals and lodging); 129 (dependent care assistance programs); 132 (excluding value of various fringe benefits including de minimus and employee discounts). Additional guidance has subsequently been provided in the form of a Q&A, as well as Notice 2013-61.

Typically, health insurance is a significant benefit that is not taxable to the employee. For married couples, employer-provided insurance coverage for the employee's spouse is also tax-free. However, under DOMA, this was not a tax-free event for same-sex couples. Specifically, employees who received coverage for their same-sex spouses were treated as receiving income in an amount equivalent to the amount of the benefit ' this is often referred to as “imputed income.” For example, if an employee received health coverage for herself and her same-sex spouse, and the value of the spousal coverage was $1,000 per year, the employee would have an additional $1,000 of taxable income.

This “imputed income” could result in significant tax liability for the employee, but no additional actual income with which to satisfy the tax liability. This hardship led some employers to offer what has been coined the “gay gross-up.” These employers compensated LGBT employees at a higher rate to account for the imputed income. In other words, the employer “grossed up” the employee's income to cover, or at least mitigate, the additional tax the employee faced. Immediately post-Windsor, employers lacked guidance on whether they should continue imputing income for the cost of coverage ' Revenue Ruling 2013-17 relegates imputed income (for these purposes, at any rate) to history.

Social Security and Medicare Taxes

The Ruling and subsequent guidance also clarify that employees and employers have the option to amend three years' worth of returns or otherwise claim refunds for inclusion of imputed income (for employees) and overpayment of Social Security taxes and Medicare taxes paid on benefits (for employers). In conjunction with the Service's adoption of the state of celebration test, the ability to amend reaches to couples in states that did not in previous years (and do not currently) recognize same-sex marriage, provided the couples were lawfully married in another jurisdiction at the time.

With this IRS Revenue Ruling, which took effect Sept. 16, 2013, employers have initial guidance on how to treat the taxation of employee benefits. Employers with employees in multiple states particularly stand to benefit from these administrative explanations, as they can implement universal federal tax policies applicable to every employee, regardless of residence. Employers should discontinue the practice of imputing income to those employees who cover their same-sex spouses on health insurance plans and the employees' benefits should otherwise be administered the same as those benefits of employees in opposite-sex marriages. Further, employers should apply these federal rules across the board, regardless of jurisdiction.

Analysis

By applying the “state of celebration” test, rather than a “state of residency test,” the IRS has started a slow (or perhaps it's actually a lightning-fast) crawl toward full federal recognition of marriage equality. For instance, under the Ruling, a couple that lives in Alabama is now free to marry in Minnesota, where same-sex marriage became legal on Aug. 1, 2013, and enjoy a full panoply of federal tax benefits back home.

The Service justified its decision by the necessity of uniformity, and certainly the decision is beneficial for the administration of federal benefits. As the DOL described in its Sept. 18, 2013, Technical Release, adopting the state of residency test would have required employers to track, at all times, both the employee's and the employee's spouse's state of domicile to determine whether the marriage would be recognized to properly administer benefits. By adopting the state of celebration test, the agencies were hoping to reduce the employers' burden in this way.

However, in some ways, the agencies' objective to reduce administrative burdens has failed. Prior to Windsor, employers in the states that recognized same-sex marriage had a two-track system where employees were considered married under state law but not for federal law. But what was a headache for employers and individual taxpayers in the small number of states with marriage equality has now become a headache in the remaining 37 states. Now, in the majority of the country, employers have (or at least have the potential to have) employees who are married under federal law but not under state law. Employers still have to maintain a two-track system.

Regardless, employers should take measures to ensure that they properly implement these changes. Particularly in states that prohibit discrimination based on sexual orientation, employers should be careful to treat all married couples the same. Employers should not require any proof of marriage for same-sex couples beyond what is required of opposite-couples. If heterosexual employees are not required to show a valid marriage certificate, neither should LGBT employees.

Employers should also be sensitive to the very real possibility that they have some employees who have never shared their sexual orientation at work, but who may be faced with disclosing their newly recognized marital status in what can be an uncomfortable conversation, particularly if the employer is unprepared. The steps an employer will need to take following such a conversation depend on the state and the locations of the company's operations. Employers should train their Human Resources and other professionals accordingly.

Conclusion

The Windsor decision has far-reaching implications, many of which are yet to be known. The IRS specifically noted that it intends to issue further guidance on the retroactive application of the Windsor decision to other employee benefits and employee benefit plans and arrangements, so individuals and companies should stay tuned for more.

Sarah Riskin is an attorney with Nilan Johnson Lewis in Minneapolis. She focuses her practice on management-side labor and employment law and can be reach-ed at [email protected]. Morgan Holcomb is Associate Dean and Associate Professor at Hamline University School of Law. She teaches individual income taxation, tax policy, and the taxation of business entities. She can be reached at [email protected].'

'

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In its June 26, 2013 decision in United States v. Windsor, the United States Supreme Court held Section 3 of the Defense of Marriage Act (DOMA) unconstitutional under the due process and equal protection guarantees of the Fifth Amendment. In focusing on the states' historic responsibilities in defining and regulating marriage, the Court reasoned that so long as a particular state's regulation of marriage comports with constitutional standards, the state's regulation is to be respected. Congress's attempt in DOMA to single out state-recognized same-sex marriages was therefore unconstitutional.

Although the full reach of the ruling is yet to be seen, recent IRS guidance represents the beginning of what promises to be a long process of agency rule-making in light of the Windsor decision.

Windsor specifically addressed federal estate tax benefits, and following the case it is clear that the IRS is obliged to treat a couple as married when the couple's state recognizes them as such, at least for federal estate tax purposes. The Court itself remarked that Windsor went beyond simply estate tax and is applicable to other federal tax rules, but Windsor's impact on areas of law outside of tax remains uncertain.

That reach, however, is vitally important for employers and employees, especially considering that “marriage” pervades federal statutes and regulations (upwards of 1,000 federal benefits and burdens are keyed to marital status). The impact of the Windsor decision on same-sex married couples in areas including social security, housing, and employment has yet to unfold, and federal agencies have just begun the massive undertaking of determining how the Windsor decision impacts their own rules and regulations.

What Employers Should Know

A fundamental question Windsor left open is whether a couple validly married in a state that recognizes same-sex marriage but residing in another state will be considered married for federal purposes. This question has been answered, at least for federal tax purposes, by a highly anticipated IRS Revenue Ruling. In Revenue Ruling 2013-17 (issued Aug. 29, 2013) the Service ruled broadly in favor of recognizing same-sex marriages.

The Revenue Ruling explicitly provides that all marriages ' regardless of the sex or gender of the individuals who are married ' are accorded all of the same federal tax benefits. Most significantly, the Ruling specifies that a marriage is defined by the jurisdiction where it is celebrated, not the couple's state of residence. This is referred to as the “state of celebration” rule, in contrast to a “state of residence” rule. Therefore, the IRS will recognize the marriages of couples even in states that do not recognize same-sex marriage so long as the marriage was legally contracted in another state or foreign jurisdiction. (We note that the IRS's guidance in Rev. Ruling 2013-17 is in tension with federal regulations applicable to the Family Medical Leave Act (FMLA).

In 29 C.F.R. ' 825.122, “spouse” is defined as “a husband or wife as defined or recognized under State law for purposes of marriage in the State where the employee resides, including common law marriage in States where it is recognized.” (Emphasis added). In a post-Windsor Fact Sheet, the Department of Labor (DOL) reiterated this definition without discussing its continuing vitality in light of Windsor. However, the DOL's Technical Release No. 2013-04, dated Sept. 18, 2013, expressly adopts the state of celebration rule for employee benefit plans, leading to predictions that the DOL may reverse course on the FMLA definition in time.

Federal Taxes

In addition to embracing the state of celebration rule, Rev. Ruling 2013-17 also provides that same-sex couples will be treated as married for all federal tax purposes, including income, gift, and estate taxes. Married same-sex couples now enjoy the benefits, and in some cases burdens, of marriage for all federal tax purposes. As one important example, same-sex couples are now entitled to file their returns jointly, or they may elect to use the married filing separately status. Same-sex couples are no longer permitted to file singly and in most cases they no longer have the option of filing using “head of household” status.

Some couples will find that their new joint filing status will result in a larger tax burden because of the marriage penalty, while other couples will see their tax liability reduced; all couples in recognizing states will find their tax compliance burden lightened. For many couples, however, the intangible value in being able to check “married” on the federal form might well be the most meaningful consequence of the Ruling.

Health Insurance

The benefit of providing such benefits tax-free is best illustrated by looking at health insurance, which is one area that has caused considerable trouble to employers and employees alike. Same-sex couples now have the ability to insure their spouses through employer-provided health insurance without being made to include the value of that insurance in their income. The Revenue Ruling addresses in summary fashion employer-provided health coverage benefits as well as fringe benefits provided under sections 106 (accident and health plans); 117(d) (qualified tuition reduction); 119 (meals and lodging); 129 (dependent care assistance programs); 132 (excluding value of various fringe benefits including de minimus and employee discounts). Additional guidance has subsequently been provided in the form of a Q&A, as well as Notice 2013-61.

Typically, health insurance is a significant benefit that is not taxable to the employee. For married couples, employer-provided insurance coverage for the employee's spouse is also tax-free. However, under DOMA, this was not a tax-free event for same-sex couples. Specifically, employees who received coverage for their same-sex spouses were treated as receiving income in an amount equivalent to the amount of the benefit ' this is often referred to as “imputed income.” For example, if an employee received health coverage for herself and her same-sex spouse, and the value of the spousal coverage was $1,000 per year, the employee would have an additional $1,000 of taxable income.

This “imputed income” could result in significant tax liability for the employee, but no additional actual income with which to satisfy the tax liability. This hardship led some employers to offer what has been coined the “gay gross-up.” These employers compensated LGBT employees at a higher rate to account for the imputed income. In other words, the employer “grossed up” the employee's income to cover, or at least mitigate, the additional tax the employee faced. Immediately post-Windsor, employers lacked guidance on whether they should continue imputing income for the cost of coverage ' Revenue Ruling 2013-17 relegates imputed income (for these purposes, at any rate) to history.

Social Security and Medicare Taxes

The Ruling and subsequent guidance also clarify that employees and employers have the option to amend three years' worth of returns or otherwise claim refunds for inclusion of imputed income (for employees) and overpayment of Social Security taxes and Medicare taxes paid on benefits (for employers). In conjunction with the Service's adoption of the state of celebration test, the ability to amend reaches to couples in states that did not in previous years (and do not currently) recognize same-sex marriage, provided the couples were lawfully married in another jurisdiction at the time.

With this IRS Revenue Ruling, which took effect Sept. 16, 2013, employers have initial guidance on how to treat the taxation of employee benefits. Employers with employees in multiple states particularly stand to benefit from these administrative explanations, as they can implement universal federal tax policies applicable to every employee, regardless of residence. Employers should discontinue the practice of imputing income to those employees who cover their same-sex spouses on health insurance plans and the employees' benefits should otherwise be administered the same as those benefits of employees in opposite-sex marriages. Further, employers should apply these federal rules across the board, regardless of jurisdiction.

Analysis

By applying the “state of celebration” test, rather than a “state of residency test,” the IRS has started a slow (or perhaps it's actually a lightning-fast) crawl toward full federal recognition of marriage equality. For instance, under the Ruling, a couple that lives in Alabama is now free to marry in Minnesota, where same-sex marriage became legal on Aug. 1, 2013, and enjoy a full panoply of federal tax benefits back home.

The Service justified its decision by the necessity of uniformity, and certainly the decision is beneficial for the administration of federal benefits. As the DOL described in its Sept. 18, 2013, Technical Release, adopting the state of residency test would have required employers to track, at all times, both the employee's and the employee's spouse's state of domicile to determine whether the marriage would be recognized to properly administer benefits. By adopting the state of celebration test, the agencies were hoping to reduce the employers' burden in this way.

However, in some ways, the agencies' objective to reduce administrative burdens has failed. Prior to Windsor, employers in the states that recognized same-sex marriage had a two-track system where employees were considered married under state law but not for federal law. But what was a headache for employers and individual taxpayers in the small number of states with marriage equality has now become a headache in the remaining 37 states. Now, in the majority of the country, employers have (or at least have the potential to have) employees who are married under federal law but not under state law. Employers still have to maintain a two-track system.

Regardless, employers should take measures to ensure that they properly implement these changes. Particularly in states that prohibit discrimination based on sexual orientation, employers should be careful to treat all married couples the same. Employers should not require any proof of marriage for same-sex couples beyond what is required of opposite-couples. If heterosexual employees are not required to show a valid marriage certificate, neither should LGBT employees.

Employers should also be sensitive to the very real possibility that they have some employees who have never shared their sexual orientation at work, but who may be faced with disclosing their newly recognized marital status in what can be an uncomfortable conversation, particularly if the employer is unprepared. The steps an employer will need to take following such a conversation depend on the state and the locations of the company's operations. Employers should train their Human Resources and other professionals accordingly.

Conclusion

The Windsor decision has far-reaching implications, many of which are yet to be known. The IRS specifically noted that it intends to issue further guidance on the retroactive application of the Windsor decision to other employee benefits and employee benefit plans and arrangements, so individuals and companies should stay tuned for more.

Sarah Riskin is an attorney with Nilan Johnson Lewis in Minneapolis. She focuses her practice on management-side labor and employment law and can be reach-ed at [email protected]. Morgan Holcomb is Associate Dean and Associate Professor at Hamline University School of Law. She teaches individual income taxation, tax policy, and the taxation of business entities. She can be reached at [email protected].'

'