Same-Sex Marriage Health Premiums and Tax-Qualified Retirement Plans
Currently 32 states and the District of Columbia recognize same-sex marriage. Several states have retroactively elected to have a civil union also recognized as a marriage. For example, in Illinois, effective June 1, 2014, an individual in a civil union has until May 31, 2015 to make an election to convert that civil union into a marriage and have the marriage considered retroactive to the date of the civil union. Other states, besides Illinois, that currently have this type of retroactive-election policies include Connecticut, Delaware, New Hampshire and Rhode Island.
Same-Sex Spouse Health Premiums
On June 27, 2014, the IRS issued Information Letter 2014-0012 which provides guidance and advice on how an employee should treat amounts wrongfully included as taxable income on Form W-2, Wage and Tax Statement (“W-2”) for the premiums their employer paid for their same-sex spouse’s health insurance. The IRS concluded that under Internal Revenue Code (“IRC”) §106, IRC §125 and IRS Notice 2014-1, the employer paid portion of health insurance coverage for a same-sex spouse is excludable from the taxpayer’s gross income. Additionally, if the employer offers health coverage through a cafeteria plan that permits the taxpayer to pay the employee portion of the cost of coverage through a pre-tax salary reduction, and if the taxpayer paid for the cost of their own health coverage on a pre-tax basis, then any amounts paid on an after-tax basis for spousal coverage would also be excludable from the taxpayer’s income.
Therefore, the taxpayer will be entitled to a refund on any federal income taxes paid on the value of the spouse’s health insurance coverage under the employer’s health plan, provided the spouses are legally married. The taxpayer may file a Form 1040X, Amended U.S. Individual Income Tax Return, for all years for which the statute of limitations for filing a claim for refund is open. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed.
Steps to Exclude the Value of Spousal Health Coverage from Taxable Wages
In order to correctly exclude the value of spousal health coverage that was incorrectly reported as taxable wages, employees should first contact their employer and request a Form W-2c, Corrected Wage and Tax Statement, that does not include the value of any excludable spousal health coverage in taxable wages. If the employer issues a Form W-2c, then the taxpayer can use the amounts reported on the Form W-2c when filing or amending their individual income tax return.
However, it is not always in the best financial interest of the employer to provide Form W-2c. Accordingly, considerations of the workload of the payroll department and employee relations can determine whether or not the issuance of a Form W-2c, or the seeking of a refund, is appropriate. Payroll departments that have not already done so should ensure that their Form W-2 reporting and federal employment tax withholding aligns with Windsor and subsequent IRS guidance.
If an employer does not issue a Form W-2c, then the taxpayer should file their Federal Form 1040, U.S. Individual Income Tax Return, using their original Form W-2. Additionally, they should attach Federal Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Form 4852 should be completed in the following manner:
- Enter name, Social Security Number and address on lines 1, 2 and 3.
- On line 4, enter the tax year in question and check the box indicating that the taxpayer received an incorrect Form W-2.
- On lines 5 and 6, provide the employer’s name, address, zip code and Employer Identification Number (this information can all be found on the original Form W-2).
- On line 7(a), report federal wages (Box 1) received less any excludable spousal health coverage incorrectly included.
- On line 7(b), enter the lesser of the social security maximum limitation for the year in question, or the amount reported on line 7(c).
- On line 7(c), report any Medicare wages (Box 5) less any excludable spousal health coverage incorrectly included.
- Copy the amounts reported on Form W-2 to the appropriate places on lines 7(d) through (i) of Form 4852.
- On line 9 include an explanation such as the following: “The amounts reported on Form W-2 included the value of excludable spousal health coverage. These amounts have been excluded on Form 4852 as permitted by Revenue Ruling 2013-17 and IRS Notice 2014-1.” You must also explain how the value of excludable spousal health coverage was determined. This can most adequately be done by referring to the amount reported as taxable health coverage on paystubs.
- Complete line 10 by explaining all steps taken to request a Form W-2c from the employer.
When a taxpayer completes a Federal Form 1040, they will use the amounts listed on Federal Form 4852 as opposed to the amounts listed on the originally issued Federal Form W-2. The taxpayer must sign and date both the Form 4852 and Form 1040 for filing.
Refund of Federal Employment Taxes
Taxpayers may also be entitled to a refund of federal employment taxes (Social Security and Medicare) paid on the value of excludable spousal health coverage if the statute of limitations for filing a claim for refund is open. Taxpayers should consider contacting their employer to determine whether or not the employer will seek a refund of these amounts on the taxpayer’s behalf. IRS Notice 2013-61 provides special administrative procedures for employers to file a claim using Form 941-X, Adjusted Employers Quarterly Federal Tax Return or Claim for Refund, to do so. If the employer will not seek a refund on the taxpayer’s behalf, then the taxpayer may file Federal Form 843, Claim for Refund and Request for Abatement if the statute of limitations for filing a claim for refund is open.
Tax-Qualified Retirement Plan Amendments
Prior to the Windsor decision, a tax-qualified retirement plan could treat same-sex married couples as married for only limited purposes under the plan. Effective June 26, 2013, the date of the Windsor decision, through September 15, 2013, a plan could determine the validity of a marriage based on the domicile of the couple; and, after September 16, 2013, all plans must recognize a same-sex marriage if entered into in a state or jurisdiction whose laws recognize same-sex marriages.
In order to comply with the requirements imposed by the IRS following the Windsor decision, tax-qualified retirement plans must comply with Windsor guidelines and may need to be amended by December 31, 2014. The IRS has issued guidance in Notice 2014-19 on how qualified retirement plans should treat the marriages of same-sex couples following Windsor. This notice gives examples of code requirements under which marital status is relevant to the payment of benefits, provides guidance on how to satisfy requirements in accordance with Revenue Ruling 2013-17 and states when retirement plans must be amended to comply with both Revenue Ruling 2013-17 and Notice 2014-19. It is recommended that before year-end, all organizations review their employee benefit plans in order to determine whether potential amendments are required to ensure compliance with current guidelines and federal laws.
Form 4852 and its instructions can be accessed below.
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Please contact a member of WS+B’s Healthcare Services Group at [email protected] for further questions or assistance.
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.