The IRS issued guidance today defining same-sex marriage for purposes of federal tax rules.  Following the Supreme Court’s decision in United States v. Windsor last June invalidating section 3 of the Defense of Marriage Act (DOMA), federal law no longer limits the definition of marriage to opposite sex spouses.  However, the Windsor decision did not rule on whether states are required to recognize same-sex marriages, and most states still do not.  Following the Windsor decision, the question remained whether federal law would recognize same-sex marriages only for couples who reside in states that recognize same-sex marriage or whether all same-sex marriages will be recognized for purposes of federal law.  The IRS answered that question with respect to the Internal Revenue Code, stating that for federal tax purposes, a marriage includes any same-sex marriage validly entered into in a state or foreign jurisdiction that recognizes same-sex marriage, even if the individuals reside in a state that does not recognize same-sex marriage.  This is commonly known as the “place of celebration” rule.

The IRS guidance (which includes a revenue ruling and FAQs covering same-sex spouses and domestic partners) addressed related issues, including the following:

Tax Refunds for Employees and Employers.  The IRS also indicated that it would provide refunds to individuals for income tax and employment tax previously paid with respect to employer-provided health benefits covering same-sex spouses.  In addition, the IRS will establish a special administrative procedure under which employers may seek refunds of employment tax paid by the employee and the employer on health benefits for same-sex spouses of employees.  The employer will need to notify the employee, but if the employee declines to participate in the employer’s request for a refund, the employer may seek a refund of the employer’s portion of the employment tax.  Similarly, if the employer makes reasonable efforts to locate an employee but is unable to locate the employee, the employer may still seek a refund of the employer portion of the employment tax paid on such health benefits.

Effect on Tax-Qualified Plans.  The IRS stated that tax-qualified plans are required to recognize same-sex marriages, and the plans must use a place of celebration rule, with respect to mandates imposed by the Internal Revenue Code.  For example, death benefits that must be paid by a tax-qualified plan to a participant’s surviving spouse must be paid to a same-sex surviving spouse.

Domestic Partnerships and Civil Unions.  The IRS stated that domestic partnerships and civil unions that are not denominated as marriages under state law would not be treated as marriages for federal tax purposes.

Retroactivity.  The IRS ruling is effective September 16, 2013.  The IRS stated that it will issue guidance in the future addressing the retroactive effect (i.e., for periods before September 16, 2013) of the Windsor decision on employee benefit plans, including plan amendment requirements and “any necessary corrections.”   According to the IRS, the guidance will take into account the potential consequences of retroactive application to all taxpayers involved, including the plan sponsor, the plan or arrangement, employers, affected employees, and beneficiaries.  On the other hand, taxpayers may rely on the new guidance retroactively with respect to filing amended tax returns, which would include filing requests for refunds.  The IRS specifically stated that, if an employee paid for his or her own health coverage on a pre-tax basis under a cafeteria plan and, under the plan, paid for health coverage for a same-sex spouse on an after-tax basis, the payments for spousal coverage may be treated as pre-tax salary reduction amounts.