Effect of U.S. v. Windsor on Federal Tax Withholdings and ERISA

October 15, 2013

The United States Supreme Court’s decision in U.S. v. Windsor struck down Section 3 of the Defense of Marriage Act of 1996 (DOMA), which had established the federal definition of marriage as “a legal union between one man and one woman,” and the definition of “spouse” referred only to a person of the opposite sex as husband or a wife.  The Internal Revenue Service (IRS) and the Department of Labor (DOL) have recently provided new guidance with respect to how lawfully married same-sex spouses will be treated for withholding purposes and under the Employee Retirement Income Security Act (ERISA).

The State of Celebration Rule

Both the IRS and DOL are applying the “state of celebration” rule which recognizes “spouses” and “marriages” based on the validity of the marriage in the state of celebration, rather than based on the married couple’s state of domicile. The rule was created to facilitate the smooth implementation of the Windsor decision prompting both the IRS guidance and DOL guidance.

It is important to note that, despite the fact that county clerks throughout the state of New Mexico have begun issuing same-sex marriage licenses because the issue has not yet been addressed by either the New Mexico Legislature nor the New Mexico Supreme Court, same-sex marriages performed in New Mexico are not currently recognized by the IRS or DOL guidance. However, the New Mexico Supreme Court is expected to make a determination on this issue in the next few months, so it is imperative that employers prepare for such a determination. Regardless of the status of same sex marriages celebrated in New Mexico, it is extremely important for employers to recognize they may already employ individuals who were married to a same-sex partner in another state or foreign jurisdiction where such unions are recognized by the IRS and DOL guidance, and these changes may already require adjustments to IRS withholdings and benefit plans.

Employer IRS Withholdings

Employers should determine how to correct IRS withholdings for employees with a same-sex spouse. There are two options. First, an employer can determine the amount of withholdings for same-sex spouse benefits paid to or on behalf of an employee in the third quarter of 2013 and repay or reimburse the employee for these amounts. Alternatively, the employer can choose not to repay or reimburse the employee for the overcollected amount and report the overcollection amount on its fourth-quarter return. The IRS has developed two special administrative procedures to assist employers with making adjustments or claiming refunds. I.R.S. Notice 2013-61 (Sept. 13, 2013).

Employee Benefits

Employers should consider revising benefit forms to reflect that same-sex spouses married in a state whose laws recognize same-sex marriage now have spousal benefit rights under most 401(k) plans, ERISA-covered 403(b) plans and certain other defined contributions plan, and must be treated as the primary beneficiary of 100% of the participant’s plan accounts unless the spouse consents to the designation of another beneficiary in writing. The impact of Windsor is significant in this area and employers should begin reviewing all employee benefit plans and forms to ensure compliance with federal guidance.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Contributed by tax attorney Suzanne Wood Bruckner and employment attorney Lynn E. Mostoller.  For more information, contact Ms. Bruckner at 505-883-3443 or SWB@sutinfirm.com or Ms. Mostoller at 505-883-3315 or LEM@sutinfirm.com.

Sutin, Thayer & Browne is New Mexico’s largest women-owned law firm, providing exceptional legal services in Albuquerque and Santa Fe since 1946.

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