Category Archives: Payroll Issues

IRS Weighs In on 401(k) “Match” to Student Loan Repayments

accomplishment-celebrate-ceremony-267885

The IRS has approved an arrangement under which an employer “matches” employee student loan repayments by making non-elective contributions to its 401(k) plan on behalf of the employees paying the loans. The guidance is in the form of a Private Letter Ruling (PLR 201833012) that is only citable authority for the taxpayer who requested the ruling, but it is a promising development on the retirement plan front given the heavy student loan debt carried by current millennial employees and the generations following them. The program described in the ruling solves the problem of low 401(k) plan participation by employees who are carrying student loan debt, allowing them to obtain the “free” employer matching funds that they would otherwise forego.

The employer who obtained the ruling maintained a 401(k) plan that included a generous matching formula – 5% of eligible compensation for the pay period, provided that the employee made an elective deferral of at least 2% of compensation for the pay period. The employer proposed establishing a “student loan repayment (SLR) nonelective contribution” program with the following features:

Program Features
• It would be completely voluntary; employees must elect to enroll;
• Once enrolled, employees could opt out of enrollment on a prospective basis;
• Enrollees would still be eligible to make pre-tax or Roth elective deferrals, but would not be eligible to receive regular matching contributions while enrolled;
• Employees would be eligible to receive “SLR nonelective contributions” and true-up matching contributions, as described below; and
• If an employee initially enrolls in the program but later opts out of enrollment, the employee will resume eligibility for regular matching contributions.

SLR Nonelective Contributions
• If an employee makes a student loan repayment during a pay period that equals at least 2% of compensation for the pay period, the employer will make an SLR nonelective contribution equal to 5% of compensation for the pay period.
• Although based on each pay period’s compensation, the collective SLR nonelective contribution will be made as soon as practicable after the end of the plan year. (Because employees may stop and restart student loan repayments or regular elective deferrals, presumably it would not be possible for an employer to know, before the end of the plan year, precisely how much SLR nonelective contributions, and catch-up contributions, each program participant is due.)
• The SLR nonelective contribution is made regardless of whether or not the employee makes any regular salary deferrals throughout the year.
• The employee must be employed on the last day of the plan year (other than when employment terminates due to death or disability) in order to receive the SLR nonelective contribution.
• The SLR nonelective contributions are subject to the same vesting schedule as regular matching contributions.
• The SLR nonelective contributions are subject to all applicable plan qualification requirements: eligibility, vesting, distribution rules, contribution limits, and coverage and nondiscrimination testing.
• The SLR nonelective contributions will not be treated as a regular matching contribution for purposes of 401(m) testing.

True-Up Contributions
• In the event an employee does not make a student loan repayment for a pay period equal to at least 2% of the employee’s eligible compensation, but does make a regular elective deferral equal to at least 2% of compensation, the employer will make a “true-up matching contribution” equal to 5% of the employee’s eligible compensation the pay period.
• Although based on pay period compensation, the collective true-up matching contribution will be made as soon as practicable after the end of the plan year.
• The employee must be employed on the last day of the plan year (other than when employment terminates due to death or disability) in order to receive the true-up matching contribution.
• The true-up matching contributions are subject to the same vesting schedule as regular matching contributions.
• The true-up matching contributions are treated as regular matching contributions for purposes of 401(m) testing.

The specific ruling that the IRS made was that the SLR nonelective contribution program would not violate the prohibition on “contingent benefits” under applicable Income Tax Regulations. Under this rule, an employer may not make other benefits, such as health insurance, stock options, or similar entitlements, contingent on a participant’s making elective deferrals under a 401(k) plan. There are a few exceptions, most notably employer matching contributions, which are expressly contingent on elective deferrals. Because the SLR nonelective contributions are triggered by employees’ student loan repayments, and not by elective deferrals, and because employees who receive them are still eligible to make regular elective deferrals, the IRS concluded that they did not violate the contingent benefit rule. The IRS stated that, in reaching this conclusion, it presumed that the taxpayer had not extended any student loans to employees who were eligible for the program and had no intentions to do so.

Closing Thoughts
Existing vendors who help employers contribute towards student loan repayments will probably move to establish and market versions of the SLR nonelective contribution program described in the private letter ruling, in which case additional, and more broadly applicable, IRS guidance would be welcome. In the meantime, employers wishing to put such a program in place should not assume that reproducing the facts in the ruling is a safe harbor from adverse tax consequences, and should consult legal counsel to assess potential liability.

Note:  The employer who obtained the Private Letter Ruling was later identified as Abbott Labs.

Leave a comment

Filed under 401(k) Plans, Benefit Plan Design, ERISA, Payroll Issues, Student Loans

IRS Gifts Large Employers an ACA Reporting Extension

Under the ACA, Applicable Large Employers (ALEs) must comply with annual reporting and disclosure duties under Section 6056 of the Internal Revenue Code (“Code”). These include filing, with the IRS, a Form 1094-C transmittal form, together with copies of Form 1095-C individual statements that must also be furnished to full-time employees (and to part-time employees who enroll in self-insured group health plans).

In a holiday-time gift to ALEs, the IRS just extended the deadline to furnish Form 1095-Cs to employees by 30 days, from January 31, 2018, to March 2, 2018. ALEs must still file Form 1095-C employee statements with the IRS by the normal deadline of February 28, 2018 (paper) or April 2, 2018 (e-file). However, due to the across-the-board extension to March 2, 2018, the IRS will not be granting any permissive 30-day extensions to furnish Form 1095-C to employees. And, while granting the extension, the IRS still encourages ALEs to furnish the 2017 employee statements as soon as they are able, and also to file or furnish late rather than not file or furnish at all, where applicable. ALEs may still obtain an automatic extension on the filing deadlines by filing Form 8809, and may obtain an additional, permissive 30-day filing extension upon a showing of good cause. In summary, the deadlines for 2017 ACA reporting are as follows:

File 2017 Form 1094-C with IRS:           February 28, 2018 (paper); April 2, 2018, (e-file)

File 2017 Form 1095-Cs w/IRS:               February 28, 2018 (paper); April 2, 2018 (e-file)

Furnish 2017 Form 1095-Cs to Employees:       March 2, 2018

Additionally, the IRS extended, for another year, the transition relief that has been in place since ACA reporting duties first arose in 2015. Under the transition relief, the IRS will not impose penalties on employers who file Forms 1094-C or 1095-C for 2017 that have missing or inaccurate information (such as SSNs and dates of birth), so long as the employer can show that it made a good faith effort to fulfill information reporting duties. There is no relief granted for ALEs who fail to meet the deadlines (as extended) for filing or furnishing the ACA forms, or who fail to report altogether.

This news is be welcome given that all U.S. employers will be grappling with new income tax withholding tables early in 2018 given the passage of the Tax Cuts and Jobs Act of 2017, which President Trump signed in to law on December 22, 2018. We’ll be providing more information on the Act’s impact on employment benefits after the Christmas holiday.

 

Leave a comment

Filed under Affordable Care Act, Applicable Large Employer Reporting, Health Care Reform, Minimum Essential Coverage Reporting, Payroll Issues, Post-Election ACA, PPACA, Tax Cuts and Jobs Act

State Auto-IRA Programs: What Employers Need to Know

pelskgra2nu-fabian-blank

California and four other states (Connecticut, Illinois, Maryland and Oregon) have passed legislation requiring employers that do not sponsor employee retirement plans to automatically withhold funds from employees’ pay, and forward them to IRAs maintained under state-run investment programs. Provided that these auto-IRA programs meet safe harbor requirements recently defined by the Department of Labor in final regulations, the programs will be exempt from ERISA and employers cannot be held liable for investment selection or outcome.  The DOL has also finalized regulations that would permit large cities and other political subdivisions to sponsor such programs where no statewide mandate exists; New York City has proposed its own such program, tentatively dubbed the New York City Nest Egg Plan.

In light of this growing trend, what do employers need to know about auto-IRA programs?   Some key points are listed below:

  1. Some Lead Time Exists. Even for state auto-IRA programs that become effective January 1, 2017 (e.g., in California and Oregon), actual implementation of employee contributions is pushed out to July 1, 2017 (in Oregon) and, in California, enrollment must wait until regulations governing the program are adopted. The California program, titled the California Secure Choice Retirement Savings Program, also phases in participation based on employer size. Employers with 100 or more employees must participate within 12 months after the program opens for enrollment, those with 50 or more within 24 months, and employers with fewer than 50 employees must participate within 36 months. These deadlines may be extended, but at present the earliest round of enrollment is anticipated to occur in 2019.
  2. Employer Involvement is Strictly Limited. The DOL safe harbor prohibits employer contributions to auto-IRAs and requires that employers fulfill only the following “ministerial” (clerical) tasks:
    • forwarding employee salary deferrals to the program
    • providing notice of the program to the employees and maintaining contribution records
    • providing information to the state as required, and
    • distributing state program information to employees.  Note that in California, the Employment Development Department will develop enrollment materials for employers to distribute, and in addition a state-selected third party administrator will collect and invest contributions, effectively limiting the employer role to forwarding salary deferrals.
  3. Employers Always Have the Option of Maintaining their Own Plan. Generally the state auto-IRA programs established to date exempt employers that maintain or establish any retirement plan (401(k), pension, SEP, or SIMPLE), even plans with no auto-enrollment feature or employer match used to encourage employee salary deferrals. Therefore employers need not be significantly out of pocket (other than for administrative fees) to avoid a state auto-IRA mandate. Employers should bear in mind that an employer-sponsored retirement program, even if only a SEP or SIMPLE IRA, helps to attract and retain valued staff, and should consider establishing their own plan in advance of auto-IRA program effective dates for that reason.
  4. Penalties May Apply. California’s auto-IRA program imposes a financial penalty on employers that fail to participate.   The penalty is equal to $250 per eligible employee if employer failure to comply lasts 90 or more days after receipt of a compliance notice; this increases to $500 per employee if noncompliance extends 180 or more days after notification. The Illinois auto-IRA program imposes a similar penalty.
  5. Voluntary Participation in Auto-IRA Program May Create an ERISA Plan. One of the requirements of the DOL safe harbor is that employer participation in auto-IRA programs (referred to as “State payroll deduction savings programs” be compulsory under state law. If participation is voluntary, an employer will be deemed to have established an ERISA plan. In theory, this rule could be triggered when an employer that was mandated to participate later drops below the number of employees needed to trigger the applicable state mandate (for instance, a California employer that drops below 5 employees), but continues to participate. The DOL leaves it to the states to determine whether participation remains compulsory for employers despite reductions in the number of employees.   The DOL also notes that, under an earlier safe harbor regulation from 1975, an employer that is not subject to state mandated auto-IRA programs can forward employees’ salary deferrals to IRAs on their behalf without triggering ERISA, provided that the employee salary deferrals are voluntary and not automatic.   The DOL final regulations can be read to suggest that a payroll-to-IRA forwarding arrangement that is voluntary and that meets the other requirements of the 1975 safe harbor will constitute a pre-existing workplace savings arrangement for purposes of exempting an employer from a state-mandated auto-IRA program.
  6. The Trump Administration Will Likely Support Auto-IRA Programs. Early and necessarily tentative conclusions are that the Trump Administration will continue to support the DOL’s safe harbor regulation exempting auto-IRA programs from ERISA, as well as other state-based efforts to address the significant savings gap now known to confront much of the country’s workforce.   One unknown variable is the degree to which the Trump Administration will be influenced by opposition to the programs mounted by the financial industry. Until the direction of the Trump Administration becomes clearer, employers that do not currently maintain a retirement plan should track auto-IRA legislation in their state or city and otherwise prepare to comply with a state or more local program in the near future, ideally by adopting their own retirement plan for employees.

 

Leave a comment

Filed under 401(k) Plans, 403(b) Plans, California Secure Choice Retirement Savings Program, ERISA, Fiduciary Issues, Payroll Issues, State Auto-IRA Programs

Benefits Compliance: Where You Get It; What You Need (Poll)

Y01VDYAX63Changes in the law and continued advances in technology have made benefits compliance a constantly shifting landscape.  As one of many potential sources for your own path towards benefits compliance, E for ERISA would very much appreciate your participation in the following poll, which asks a few simple questions about where you currently get your benefits compliance services and what you may still need in that regard.  Thank you in advance for (anonymously) sharing your thoughts and experiences.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leave a comment

Filed under 401(k) Plans, 403(b) Plans, Affordable Care Act, Applicable Large Employer Reporting, Benefit Plan Design, Employer Shared Responsibility, ERISA, Federally Facilitated Exchange, Fiduciary and Fee Issues, Fiduciary Issues, Fringe Benefits, Health Care Reform, HIPAA and HITECH, Payroll Issues, Plan Reporting and Disclosure Duties, PPACA, Profit Sharing Plan, Uncategorized

ACA Reporting for Large Employers: Top 10 Rules for Success

Applicable Large Employers have approximately one month, until March 31, 2016,  to furnish Form 1095-C to full-time employees in relation to group health coverage offered (or not offered) in 2015.  Self-insured employers must also provide Form 1095-Cs to part-time employees who were covered under their plans in 2015.  Related IRS filing deadlines (transmittal Form 1094-C and attached Forms 1095-C) come later in the year, but the March 31, 2016 deadline to furnish employee statements is hard and final.  The attached PowerPoint presentation lists the Top 10 Rules for Success in completing Applicable Large Employer reporting, and includes bonus tips on opt-out payments, and increased ACA penalty amounts for 2015 and 2016.

Leave a comment

Filed under Affordable Care Act, Applicable Large Employer Reporting, Employer Shared Responsibility, Health Care Reform, Minimum Essential Coverage Reporting, Payroll Issues, Plan Reporting and Disclosure Duties, PPACA, Self-Insured Group Health Plans

Roundup of DOMA Guidance re: Benefit Plans

The Internal Revenue Service and Department of Labor have in recent months issued initial guidance to employers on the benefit plan consequences of the U.S. Supreme Court’s June 2013 decision in U.S. v. Windsor, 133 S.Ct. 2675 (2013), which ruled Section 3 of the federal Defense of Marriage Act (“DOMA”) to be unconstitutional on equal protection grounds.  That now defunct DOMA provision limited the federal law definitions of “marriage” and “spouse” to refer only to unions between members of the opposite sex.

The recent guidance, which I summarize below (and have separately addressed in earlier posts), represents early stages in the process of fully implementing the US v. Windsor holding within ERISA’s extensive compliance regime.  Please note that this post focuses on the federal tax consequences of same-sex benefits; state taxation of such benefits, and those provided to domestic partners, depends upon the revenue and taxation laws of each state.

IRS and DOL Adopt “State of Celebration” Rule

In U.S. v. Windsor the Supreme Court held that federal law will recognize all “lawful marriages” between members of the same sex, but left open the question of which state’s law will determine whether a same-sex marriage is lawful:  the state of domicile (where the married couple lives), or the state of “celebration” (where the marriage took place).

This is an important question because the Supreme Court decision left intact Section 2 of DOMA, under which a state, territory or Indian tribe need not give effect to another state’s laws regarding same-sex marriage.  The “state of domicile” rule, if it determined whether or not a same-sex couple was legally married, could cause benefits chaos.  For instance, an employer with operations in multiple states would be required to track where each employee in a same-sex relationship lived, and possibly modify their benefit offerings if they moved from a state that recognizes same-sex marriage, to a “non-recognition” state.

Note:  As of the date of this post, the District of Columbia and 14 states recognize same-sex marriage: California (since June 28, 2013, also prior to November 5, 2008); Connecticut; Delaware (eff. 7/1/2013); Iowa; Maine; Maryland; Massachusetts; Minnesota (eff. Aug. 1, 2013); New Hampshire; New Jersey (eff. October 21, 2013); New York; Rhode Island (eff. Aug. 1, 2013); Vermont; and Washington.  (Follow updates to this list here.)

The U.S. v. Windsor ruling also gave rise to some confusion over the status, under federal law, of domestic partnerships, civil unions, and other formalized same-sex relationships that fall short of marriage.

Fortunately, both the IRS and the DOL have resolved these issues in separate guidance released in September 2013.

Specifically, in Revenue Ruling 2013-17, the IRS announced that:

  • The IRS will recognize, as a legal marriage for all federal tax purposes, a marriage of same-sex individuals that was validly entered into in a domestic or foreign jurisdiction that recognizes same sex marriage, regardless of where the couple lives.
  • Under federal tax law, the terms “husband,” “wife,” “husband and wife,” “marriage” and “spouse” includes lawful same-sex marriages and individuals in such marriages.
  • “Marriage” for federal tax purposes does NOT include domestic partnerships, civil unions, or other formal relationships falling short of marriage.

To reach these conclusions the IRS invoked a prior Revenue Ruling from 1958 (Rev. Rul. 58-66) that held that individuals who became common-law spouses under state law were entitled to be treated as legally married spouses for federal income tax purposes regardless of where they later resided.

The DOL also adopted the “state of celebration” rule for purposes of defining same-sex marriage under ERISA benefit plans, including retirement plans, in Technical Release 2013-14.  In this guidance, published September 18, 2013, the DOL also specifies that the terms “spouse” and “marriage,” for ERISA purposes, do not include domestic partnerships or civil unions, whether between members of the same sex or opposite sex, regardless of the standing such relationships have under state law.

The IRS ruling takes effect September 16, 2013 on a prospective basis.  The DOL Technical Release should be treated as effective immediately on a prospective basis.  The DOL will issue further guidance explaining any retroactive application of the U.S. v. Windsor ruling under ERISA, for instance with regard to previously executed beneficiary designations, plan distribution elections, plan loans and hardship distributions.

Other Tax Guidance from Revenue Ruling 2013-17 and FAQs

Revenue Ruling 2013-17 also contains guidance on prospective and retroactive tax filing aissues resulting from the U.S. v. Windsor decision, including refund/credit opportunities.  More specific guidance for taxpayers is set forth in separate IRS FAQs for same-sex married couples, and for couples in registered domestic partnerships.

In order to understand  the tax refund/credit procedures it is helpful first to review the federal tax consequences of providing employment benefits to same-sex spouses while Section 3 of DOMA remained in effect.

Through Internal Revenue Code (“Code”) Section 105(b), Federal law has long allowed employers to provide health and other benefits on a tax-free basis to employees, their opposite-sex spouses and dependents.  However, under DOMA § 3, the same benefits provided to same-sex spouses and other partners generally resulted in “imputed incometo the employee for federal tax purposes, in an amount generally equal to the value of the benefits provided.  Similarly, employees could not use Sec. 125 cafeteria plans to pay premiums for same-sex spouses/partners on a pre-tax basis.  Only in rare instances where the same-sex spouse was a dependent of the employee spouse as a result of disability, did same-sex spousal coverage not result in an additional federal tax burden to the employee spouse.

Note that benefits provided to domestic partners and partner in civil unions are still treated this way for Federal tax purposes.  For benefits provided to employees who are lawfully married to same-sex spouses, however, the new rules effective September 16, 2013 and prospectively are as follows:

  • Individuals in lawful same-sex marriages must file their federal income tax returns for 2013 and subsequent years as either married filing jointly, or married filing separately.
  • Employer-provided benefits provided to an employee’s lawfully-married same-sex spouse are excludable from the employee’s income for federal tax purposes.
  • As a consequence, employers must stop imputing income to employees, for federal tax purposes, based on same-sex spousal benefits, and must adjust affected employees’ Form W-2 income for 2013 to remove imputed income amounts.
  • The tax-qualified benefit plans that are affected are:
    • health, dental and vision coverage;
    • qualified tuition reduction plans maintained by educational organizations;
    • meals and lodging provided to employees on business premises (other specific conditions apply);
    • fringe benefit including qualified transportation fringe benefits, moving expenses, employee discounts, and work-related expenses; and
    • pre-tax participation in Section 125 cafeteria/flex plans, including health flexible spending accounts and dependent care flexible spending accounts.
  • Employees in lawful same-sex marriages can file amended personal income tax returns for “open” tax years (generally 2010, 2011, 2012) to recoup over-withheld federal income taxes resulting from imputed income and after-tax cafeteria plan participation.
  • However, if they re-file, they must re-file as married for all tax purposes, not just to obtain the refund or credit.  In many cases, the income tax adjustment will not warrant the loss of other deductions.  Employees must consult their individual CPAs and other tax advisors for answers; employers must refrain from offering any specific advice or guidance in this regard.

Corrective Payroll/Withholding Steps for 2013 and Prior “Open” Tax Years

IRS Notice 2013-61, published September 23, 2013, sets forth optional, streamlined ways for employers to claim refunds of over-withheld “employment taxes” (FICA and federal income taxes) applied to imputed income/same sex spouse benefits in 2013, and prior “open” tax years.

The “normal” over-withholding correction process – which remains available to employers in this instance – varies slightly depending on whether or not the employer is seeking an adjustment of withholding taxes, or a refund of withholding taxes, but generally includes the following steps:

  • identify the amount of over-withholding;
  • repay the employee’s portion to the employee in cash (or “reimburse” them by applying the overpayment to FICA taxes for current year);
  • obtain written statements from affected employees that they will not also claim a refund of over-withheld FICA taxes, and if an employer is seeking a refund of over-withheld taxes, obtain affected employees’ written consent to the refund; and
  • file IRS Form 941-X for each quarter affected, to recoup the employer portion of the tax.

Notice 2013-61 sets forth two streamlined correction methods permitting use of one single Form 941 or Form 941-X for all of 2013.  Under the first method, the employer takes the following steps before the end of the current year:

  • identify and repay/reimburse employees’ share of excess income tax, FICA tax withholdings resulting from same-sex spousal benefits on or before December 31, 2013; and
  • make corresponding reductions in affected employees’ wage and income-tax withholding amounts on the 4th quarter 2013 Form 941.

The second method is available if the employer does not identify and repay/reimburse employees’ share of excess income tax, FICA tax withholdings until after December 31, 2013.  In that case the employer:

  • Files one single Form 941-X in 2014 seeking reimbursement of employer’s share of tax with regard to imputed income for same-sex spouse benefits reported in all quarters of 2013.
  • In addition to the regular Form 941-X filing requirements, including obtaining written statements and/or consents from employees, employers must write “WINDSOR” at the top of the Form 941-X and must file amended Form W-2s (IRS Form W-2c) for affected employees, reporting the reduced amount of wages subject to FICA withholding.

Note:  This second correction method can apply only to FICA taxes.  Employers cannot make adjustments for overpayments of income tax withholding for a prior tax year unless an administrative error (e.g., wrong entry on Form 941) has occurred.

Employers may also recoup their share of FICA taxes for earlier open tax years (generally, 2010, 2011 and 2012) using one Form 941-X for all four calendar quarters that is filed for the fourth quarter of each affected year.  In addition to marking the Form “WINDSOR” the employer must also file amended Form W-2s for affected employees, reporting the reduced amount of wages subject to FICA withholding.

Employers making use of the correction methods set forth in IRS Notice 2013-61 for 2013 or earlier open years must take account of the Social Security Wage Base in effect for applicable years.  For employees whose 2013 compensation exceeds the taxable wage base ($113,700) even after imputed income is eliminated, no corrections for the Social Security component of FICA taxes can be made.  If retroactive corrections are made, you must observe the SS wage base limitations in effect in prior years:  $106,800 for 2010 & 2011, and $110,100 for 2012.

One final note:  many employers that provide benefits to employees’ domestic partners and/or same sex spouses have followed a practice of grossing up the employees’ taxable compensation to account for the additional federal taxes they must pay on imputed income.  The IRS guidance on recouping over-withheld taxes apply only to imputed income amounts, not to the gross-up amounts.  “Normal” over-withholding correction procedures using Forms 941 and 941-X should apply to 2013 gross-up amounts but employers should consult their payroll and tax advisors for specific advice.  Note also that California recently adopted a law that will exclude gross-up amounts from employees’ taxable compensation for state personal income tax purposes.  AB 362 takes immediate effect and is slated to expire January 1, 2019.  You can find a fuller discussion of the measure here.

Leave a comment

Filed under Cafeteria Plans, Defense of Marriage Act, ERISA, Fringe Benefits, Payroll Issues, Registered Domestic Partner Benefits, Same-Sex Marriage, U.S. v. Windsor

IRS Details Benefit Parity for Same-Sex Spouses

In U.S. v. Windsor, the Supreme Court struck down Section 3 of the Defense of Marriage Act as a violation of the 5th Amendment’s guarantee of equal protection under the law.  Section 3 defined “marriage” and “spouse” for purposes of Federal law as limited to a legal union between one man and one woman as husband and wife.  Elimination of this standard impacts a multitude of Federal laws, and guidance from a number of Federal agencies will be needed before the ruling fully is integrated into the U.S. Code.

Some of the first of that guidance explains Federal tax treatment of same-sex spouses under certain employment benefits plans and arrangements.  The guidance was released on August 29, 2013 by the Treasury Department and the Internal Revenue Service, in the form of Revenue Ruling 2013-17 and two sets of Frequently Asked Questions (FAQs.)  I addressed this guidance briefly in my prior post.  Below I go into more detail on the key compliance points of relevance to employers:

Treatment of Same-Sex Marriage under Federal Tax Law

  • Same-sex marriages lawfully performed in any U.S. state, the District of Columbia, or a foreign county are valid as marriages under Federal tax law, regardless of where the couple reside.
    • This means that employers with operations in states that do not recognize same-sex marriage, such as Texas, must treat same-sex spouses residing in those states equal to opposite-sex spouses for Federal tax purposes, so long as the couple legally was married in a state or other locale that recognizes same-sex marriage.
    • Obviously, equal Federal tax treatment is also required in those states that currently recognize same-sex marriage: California (since June 28, 2013; also some unions prior to November 5, 2008); Connecticut, Delaware (eff. July 1, 2013); Iowa, Maine, Maryland, Massachusetts, Minnesota (eff. Aug. 1, 2013); New Hampshire, New York, Rhode Island (eff. Aug. 1, 2013); Vermont; Washington; District of Columbia.
    • For Federal tax purposes, the terms “spouse,” “husband and wife,” “husband” and “wife” and “marriage” include reference to lawful same-sex marriage as defined above.
    • Registered domestic partnerships, civil unions, or other relationships formalized under state law as something other than marriage are not treated as marriage for Federal tax purposes, whether between same-sex or opposite sex individuals.
      • The Internal Revenue Code (“Code”) permits tax-free treatment of employer-sponsored benefits, including health care, offered to employees, their spouses (now including same-sex spouses) and dependents.  Employer-sponsored benefits provided to individuals not meeting these categories constitutes taxable income to the employee; specifically “imputed” income generally equal to the value of the benefits provided.
      • These rulings take effect September 16, 2013 and subsequent, but have some retroactive effect as described below.

Compliance Point:  As a result of these rulings, employers must identify employees who are in legal same-sex marriages, and, for those employees, adjust income tax withholding, and Social Security and Medicare taxes for 2013, so that the cost of benefits provided to same-sex spouses are treated as excluded from gross income.  Employers must continue to impute income to employees for Federal tax purposes, equal to the value of benefits provided to registered domestic partners, partners in a civil union, and other non-marital relationships, whether same-sex or opposite sex.

Tax Refunds and Credits for Prior “Open” Tax Years

Individuals in Lawful Same-Sex Marriages

  • Individuals in legal same-sex marriages must file their income tax returns for 2013 and subsequent as either “married filing jointly” or “married filing separately.”
  • These individuals may – but are not required to – amend or re-file their income taxes, and claim tax refunds or credits, for all “open” tax years in which they were in a legal same-sex marriage.
    • Generally, for refund or credit purposes a tax return remains “open” for three years from the date the return was filed or two years from the date the taxes reported in the return were paid, whichever is later.
      • For individuals who timely filed their Form 1040 tax returns and paid related taxes by the April deadline each year, returns for 2010, 2011 and 2012 likely remain open, however readers must confirm with their own accountants or other tax advisors which tax years remain open for them.
      • The retroactive tax relief is as follows:
        • As mentioned, individuals in lawful same-sex marriages may re-file their federal tax returns as “married filing jointly,” or “married filing separately,” which was not previously an option under Federal law.
          • Note:  this change in filing status could significantly change the amount of  federal taxes owed and readers must consult with their own accountants or other professional tax advisors about the impact to their own bottom line.
  • Individuals may request a refund of income taxes they paid on “imputed income” resulting from benefits provided to same-sex spouses.  This relief can also take the form of a credit against future income taxes owed.
    • Example:  Alex legally was married to a same-sex spouse for all of 2012.  Alex’s employer offers group health coverage to employees, their spouses and dependents, and pays 50% of the cost of coverage elected by the employee.  The value of the employer-funded portion of coverage for Alex’s spouse was $250 per month.  Alex may file an amended Form 1040 (Form 1040X) for 2012 that reduces gross income by $3,000 ($250 x 12 months) and be refunded the taxes paid on that amount.
    • Employees who paid for their own health coverage with pre-tax dollars under a Code § 125 cafeteria plan have the option of treating after–tax amounts that they paid for same-sex spouse coverage as pre-tax salary reduction amounts.
      • Example:  Alex’s employer sponsors a group health plan under which employees must pay the full cost of spousal and dependent coverage.  However, they may do so with pre-tax dollars under a Section 125 cafeteria plan.  During open enrollment in late 2011 Alex enrolled in self-only coverage for 2012, but she entered into a legal same-sex marriage on March 1, 2012.  Alex enrolled her spouse in health coverage beginning March 1, 2012.  The monthly premiums were $500.  Alex may file an amended Form 1040 (Form 1040X) for 2012 that reduces her gross income by $5,000 ($500 x 10 months).  This puts her in the position she would have been in, had she been able to increase her salary reductions under the cafeteria plan to cover spousal coverage beginning in March 2012.
    • Other benefit plans with regard to which retroactive tax relief is available include qualified scholarships under Code § 117(d), fringe benefits under Code § 132, dependent care benefits under Code § 129, and employer-provided meals or lodging under Code § 119.
    • Note:  individuals who seek a tax refund or credit related to imputed income credited to them in past, open tax years must adjust their tax returns for those years consistent with the tax status (i.e., married filing jointly or separately) that they are claiming with respect to the refund or credit.  In other words, an individual cannot seek a refund of taxes paid for imputed income credited to them in 2012, but retain their status as a single taxpayer for 2012.

Compliance Point:  Employers need to be aware that employees in same-sex marriages may be filing amended returns and seeking tax refunds related to these benefits, and take steps to quantify the imputed income or provide other information to employees to assist in retroactive tax relief.

Employers

  • Retroactive income tax relief is only available to individuals; employers may not seek refunds for overwithheld income taxes in prior years.
  • Employers may seek a refund of Social Security and Medicare taxes paid on imputed income resulting from same-sex coverage, or claim a credit against future taxes owed.
  • The relief is available for “open” tax years which generally are the same as for individual tax returns (3 years from date of filing return or 2 years from date of paying taxes, whichever is later).
    • For purposes of calculating the open period, quarterly Form 941s are treated as if they were all filed on April 15 of a given calendar year.
    • The relief generally applies to the employer and employee portions of Social Security and Medicare taxes, however employers are limited to recovery of the employer portion only in two instances:
      • In relation to an employee who cannot be located, or
      • When the employer notifies an employee that it is seeking a refund but the employee declines, in writing, to participate in same.
    • The IRS will establish a “special administrative procedure” for employers to seek refunds or claim credits for Social Security and Medicare taxes related to same-sex spousal benefits, to be defined in future guidance.

Compliance PointEmployers should be alert to future guidance from the IRS on  the “special administrative procedures” that will apply to Social Security and Medicare tax refunds, and should take steps to quantify the amounts involved for open tax years.

Retirement Plan Issues

The IRS Frequently Asked Questions for individuals in lawful same-sex marriage begin to address same-sex spouse treatment under qualified retirement plans (QRPs), including 401(k) and profit sharing plans.  Much more guidance in this area will be needed both from Treasury and from the Department of Labor.  The following guidance applies as of September 16, 2013 and subsequent.  Future guidance will address any retroactive application of Revenue Ruling 2013-17 to retirement plans and other tax-qualified benefits, including with regard to plan amendments and plan operation in the interim between September 16, 2013 and the date such future guidance is published.

  • QRPs must treat a same-sex spouse as a spouse for all Federal tax purposes relating to QRPs, regardless of where the same-sex spouses reside.
    • For instance, a QRP maintained by an employer in Florida, which does not recognize same-sex marriage, must pay a survivor annuity to a surviving same-sex spouse of a plan participant, unless the spouse consented in writing to another beneficiary prior to the participant’s death.
    • QRPs are not required to treat registered domestic partners, partners to a civil union, or partners to other formalized but non-marital relationships as spouses, whether the partners are same-sex or opposite sex.
      • For instance, a QRP need not pay a surviving spouse annuity to a registered domestic partner upon a participant’s death.  However a plan may treat a registered domestic partner as a default beneficiary who will receive a plan benefit if the participant failed to choose another beneficiary.  Plans must also treat registered domestic partners as designated beneficiaries when they are named as such by the participant.

Compliance PointEmployers should be on the alert for future guidance on QRP administration related to same-sex spouses.  In the interim, check with your company’s accountant or other tax professional if same-sex spouse benefit questions arise.

Affordable Care Act Issues

Not all of the consequences of Federal tax recognition of same-sex marriage are positive.  Under the Affordable Care Act, couples in a legal same-sex marriage now must combine their incomes for purposes of determining eligibility for premium tax credits and cost sharing on the healthcare exchanges, beginning in 2014.  This may prevent some persons in same-sex marriages from receiving federal financial aid they would have qualified for, as unmarried individuals.

The reason for this is that financial aid towards health coverage on the exchanges is based on “household income” and household income must be between 100% and 400% of federal poverty level for financial aid to apply.  Couples whose combined income exceeds 400% of the Federal Poverty Level (currently $62,040 for a 2-person household) will be ineligible for any financial aid toward the cost of coverage even if, individually, the same-sex spouses might have qualified for coverage on their own.

Additionally, “dependent” coverage which must be offered by applicable large employers in 2015 applies to children up to age 26, but not to “spouses,” and hence not to same-sex spouses.

Hopefully, future guidance from the IRS and from Health and Human Services will address in more detail the impact that Federal tax treatment of same-sex marriages has under the Affordable Care Act.

Compliance Point:  Employers need to be aware that household income for employees in legal same-sex marriages will include their spouse’s compensation and will likely impact their eligibility for financial aid towards coverage on the health exchanges.

2 Comments

Filed under 401(k) Plans, Affordable Care Act, Benefit Plan Design, Cafeteria Plans, Defense of Marriage Act, Employer Shared Responsibility, ERISA, Fringe Benefits, Health Care Reform, Health Insurance Marketplace, Payroll Issues, PPACA, Profit Sharing Plan, Registered Domestic Partner Benefits